Applied Materials Aktie

Welcome to the Bank of America Global Technology Conference, Vivek Arya from Bank of America, Semiconductor and Semicap equipment team. I'm really delighted to kick off the semiconductor part of our Global Tech Conference with the team from Applied Materials. I'm really delighted to have Brice Hill, the Chief Financial Officer. Warm welcome, Brice.

Good morning. Thank you for having us, Vivek. Glad to be here.

Yes. Thank you so much for joining us again. And I'll go through my questions, but please feel free to raise your hand if you would like to bring up something on your own. So, Brice, I guess, understatement that very exciting times in semiconductors. Every day you wake up, there's like some more news about demand growing. Maybe just walk us through your state of the union, right, at the start of the year, Applied was looking at a growth rate of 20% in your semi systems business, you upped it to 30%. Where have been kind of the incremental growth drivers in the near term, and then we'll talk about what you're seeing on -- over the horizon?

Sounds good, Vivek. So state of the union, the union is strong. We increased demand, and we increased our forecast, as you highlighted there to over 30% growth for our semiconductor systems business and that was an increase over prior quarter, as you saw new orders coming in from customers. And no surprise, at least relative to the news flow, we were just chatting about incremental investments that are being announced across the ecosystem. I think what's different about what's happening today is people can really connect the dots between the demand function of AI.

Our companies are using AI. We're deploying it in multiple ways. People are using it personally. So when they hear the cloud service providers talk about hundreds of billions of dollars of capacity adds to drive the compute behind AI, nobody is surprised. They can connect the dots to the demand. And that's certainly what we're seeing in our business. We talked about how leading-edge logic is growing very strongly. We talked about how DRAM is growing very strongly, and we talked about how advanced packaging, which is used to build the connected systems of all these components and drive the AI usage models, that's also growing very strongly in our business.

And those things, we received new orders in the last quarter. Customers are being more and more creative about finding clean room space and options to expand their output. That translates into new orders from us, and then translated into a higher growth expectation for this year. I know we'll talk about this, but we're -- the customers are working closely with us to give us a good perspective of what their growth plans are over the coming years.

Then in our services business, we had previously said, our services business would grow in the low double-digit growth range. I think the easy way to think about this is there's 2 drivers of growth in the services business. One is the installed base of equipment, and the other is the new products that we announced and create each year, which grows the value of each tool in your installed base. Because the systems business is shipping more and more tools, the demand we just talked about, the installed base for the services business grows and so we see that happening. We increased our expectation for growth in the services business to mid-teens. And we said actually this year will be a little bit higher than mid-teens because this year gets a plus also from the increasing utilization across the entire ecosystem.

So as the DRAM fabs went from whatever utilization they were at to 100% utilized. And as leading-edge logic goes to 100% utilized and even the ICAPS, the mature nodes, utilizations improve, that helps drive some uplift for the services business. So really a strong signal across all of our businesses as we look at the demand type today.

Got it. If we were to try and dissect this upgrade of the growth rate, does any specific areas stand out, Brice, like whether it was foundry logic or DRAM, NAND or advanced packaging, like did something really start to grow much faster than what you had thought before?

Well, I think in the short term, it's hard to separate leading-edge logic and DRAM. I think both of those are a very strong signal. And we didn't call one higher than the other. I guess as we look at factory projects that have been added over the last quarter, this is more longer-term signal. I think there's more DRAM adds than there are logic adds, but at least the way I think about it, and everybody can start to dissect the architectures of newly announced server systems and system platforms, but these things are traveling together. You've got a significant amount of leading-edge logic between GPUs, CPUs and accelerators paired with different memory types in a system. And so those things are being driven together.

Yes. Got it. And what are the main areas of constraints that you see? So theoretically, what can make this X percent growth rate more than X right now, why can't it be 35% or 40%? Are you limited just by clean rooms? Are you limited by your ability to produce new tools, the ability for the customers? Like, what are the main areas of constraints right now?

Yes. I think the primary -- we said that demand right now is metered by clean room space. And I think that is the right way to think about it. We've been talking about getting an 8-quarter rolling forecast from our customers, which we consolidate and give to our suppliers. And we've talked about, Vivek, how we added capacity, our own manufacturing capacity. So I think with the right signal, we can increase our output, and we're not the limiter from that perspective.

We certainly have manufacturing capacity available. And if we give our supply chain to lead, we think. So what's really the governor here, the governor here is it takes 3 or 4 years to build a fab. And so you need a pipeline of fab projects, which there is a pipeline of fab projects, but if you want that to go even faster, it takes some time to increase that pipeline. And I think that's what all the customers are working on. So in the short term, it's really clean room, making more clean room available and that's what -- in this year, that's what we saw some of the customers doing is even optimizing the clean room they do have available.

Got it. Yes. Actually, I wanted to pick up on that. When you say optimizing the clean room, are they upgrading to tools sooner than they would have otherwise? Like what does optimization mean to Applied?

Yes. I think we saw a number of different example types of literally just optimizing clean room floor space, so you might change layout, upgrading tools that were underperforming, upgrading process technologies from one node to another node. Those are some of the examples we saw as well as even some utilization of 200-millimeter space for 300-millimeter purposes. We see all of these things going on in the ecosystem.

Got you. And then you mentioned there is a 8-quarter kind of rolling visibility, what is your normal visibility? Like how should we put this 8 quarter in context of what Applied has seen historically?

Yes. It's great because first, I want to say that we have -- we always actually have a little bit longer than that. So we know just like people here know, because you see public announcements, we know all the fabs that are being built by our customers, although it's more precise for the largest customers than it is, for example, of some of the smaller customers in China, right? But you have an indication of what is out there 4 years from now, 5 years from now, 3 years from now, that goes into the fab tracker that we talk about and the like.

But when we start talking about 8 quarters, what we get from our customer when you go to 8 quarters is you get the precise process technology, the actual tool recipe that they're going to deploy, which tells us the types of tools, the number of tools and the specs of those tools that will be needed for that particular project as well as when they need to land, and we install those tools also, so we have to have install tools -- teams available to do that work. So it's really connecting the dots at a much more precise level.

And then when we get that from our customers, we consolidate that forecast, turn it into a forecast that we can provide to our suppliers, our 2,000 suppliers. So adding up all of -- if you think about adding up TSMC and Intel and Samsung, all of our large customers, and they all might need power supplies and you're aggregating that and saying, these are how many power supplies we need for the company, specific types and translating that to your supply chain so that they can put the capacity in place to deliver that product. That's really the purpose of getting that type of visibility. And I think it's working very well for us at this point.

Got it. So historically, the semi cap industry, and then CapEx has kind of grown 8% to 10% a year. And now the industry is at a place where you could have multiple years, conceptually, up 20%, right, 25% plus type of growth rate. What are you doing differently from an operational perspective to make sure that you're able to support customers for that kind of growth?

Yes. I think since COVID, Applied Materials, and I'm sure a lot of companies in the ecosystem, has been strengthening its manufacturing from a regional diversity perspective and also the supply chain from the same perspective. So we have more suppliers, we have more regional diversity. We have more regional diversity in our manufacturing and more raw capacity in our manufacturing. Those are definitely some of the things that we've been doing as well as working more closely with the customers than ever before on what their plans are, and what the scenarios are for the business.

So -- but I think, too, that since these are long lead investments when we were evaluating our own capacity additions over the past few years, since the business is profitable, you are sort of looking at what would be the max output required. And you don't want to miss capacity solutions if that max demand signal occurs. So you have to balance that in your planning, which comes to scenarios. Now did anyone forecast what's happening today exactly? No, but from a capacity planning perspective, you want to make those things possible.

Got it. Now specific to the growth rate for this year, how much of that do you think is share gains? How much of that is just kind of broader industry growth? Last year, there was a share shift, right? And just the same kind of moved against Applied. This year, do you think kind of the addressable opportunities moved towards you? So how much of this is share gain versus just broader industry?

Yes. This year, the mix -- I think, there's two things going on. This year, the mix is certainly friendly to Applied, as you said, having leading edges and DRAM and advanced packaging, where we have leading positions as process equipment suppliers, that's going into our wheelhouse, as you might say, but at the same time, even if that mix wasn't there, we expect to grow share in leading-edge logic, and we've talked for several years about how the transition to the gate-all-around transistor and to the newest wiring techniques will add share for Applied Materials since we've got solutions in those spaces.

We have been effective at growing share in DRAM over the last decade, and we expect to continue to grow share in DRAM. Some of the construction techniques used in leading-edge logic are being deployed in DRAM, and that's helping us add share there. And then in advanced packaging, we have a leadership position in advanced packaging, a lot of investment in advanced packaging. As we move from 2.5D, which is sort of lateral connection of chips to 3D when you're stacking chips, Applied has been investing in a lot of different packaging technologies that will be used in that roadmap as well as different substrates that may be used in that roadmap like panel, like glass, different substrates.

We've invested in hybrid bonding. We recently did an acquisition of an x-ray technology that will help us with evaluating the quality of those interconnects. We're in the process of another acquisition that helps us on the advanced packaging with fine-line interconnects between devices. So we're really focused on that portfolio as a huge opportunity for the industry and a big opportunity for Applied.

Got it. One last question on kind of the broader market, and then we'll go to the individual areas. Historically, when we just look at the ratio of wafer fab equipment to semiconductor industry sales, that's kind of varied between, say, 12%, 13% to as high as 17%, 18%, right? So the assumption has been that somewhere in the middle, right, 15% is a decent long-term number. But this year, a lot of semi industry growth is coming from ASPs rather than units. So do you think over the next 2, 3, 4 years that this will mix more towards units rather than ASPs is because units is really what will drive WFE, right? How do you kind of conceptually think about the density?

You're right. It's a great question because at least for me, I don't use that equation to think about it. But to your point, I think it was 14-ish percent last year, if you used last year's numbers. And it is subject to movement because of the different ASP trajectories that we see. But I like thinking about, as you're sort of suggesting actually that what's happening is more units are being required and more important for Applied Materials, more wafer starts are being required. So if you think about, for example, DRAM, there's 2.3, approximately 1 million wafer starts of DRAM every month. And when we look at the roadmap, we expect to see 300,000 or 400,000 wafer starts of added capacity every single year in DRAM.

So I think you sort of led in this direction, Vivek. The way we think about it is the actual wafer start output, the capacity of wafer starts is growing at the strongest rate it ever had -- has for DRAM, for leading-edge logic. And then the good news also is you have to connect those devices, so that will lead to packaging factories and packaging equipment that supports that.

So that indicator may or may not be the easy way of calculating equipment. It might be look at the amount of factories that are being built, look at the amount of wafer start increases that will go out, and that will give you an indication of the equipment business.

Got you. You mentioned DRAM, as many investors are very happy to see, right, the strong performance of DRAM and a lot of memory stocks, but there's also kind of this lingering concern that how much of this is right cyclical and -- so just theoretically, let's say if DRAM prices go down next year, do you think customers will be as motivated to add capacity? Or will they want to protect pricing? What has happened historically?

First, it's hard to picture that, but I'm open to scenario planning, so we can scenario plan. I think that one benefit the equipment side of the business has, is back to our discussion of what is metering the industry and what is currently the gate for the industry. I think it'd be very difficult to argue that we're in a position where we have too much capacity, and we've overbuilt capacity in almost a good way since it is metered, you're sort of behind the demand curve from a capacity perspective.

Certainly, if prices go down in the end devices that will -- all the customers will recalculate their ambitions and their interest in how much capacity to add. But right now, the profitability is so significant that I think there -- I think they're really trying to figure out how can they maximize output over the next 5 years.

Right. And I would assume that as many of them are signing long-term agreements with their customers, right? They're also on the hook to make sure that there is some capacity, right, to support all those?

Absolutely.

Right? Agreements. Staying on the topic of memory, how is your content evolved, right, from the various versions of HBM3, 4, and I saw last night, Samsung is now starting to talk about HBM5 as well. So how is your kind of opportunity and content involved in these different HBM generations?

Yes, I think the way to think about it for Applied Materials is, as you move forward on these HBM technologies. We talk about -- it increases the overall demand for DRAM. And it also -- there's a trade ratio on the HBM DRAM where it was around 3:1. So it takes 3x the wafer die area to make a DRAM device, if it's going to be stacked. And that trade ratio is moving to 4:1 now with the newer generations of HBM.

And so DRAM is already operating at full utilization. We're only adding more requirements on to DRAM. So I think this just ups that demand signal even more strongly than where it was before. And our customers, we expect, will be adding factories. Like we saw in the last quarter, they'll be adding factories and telling us shortly with our 8-quarter forecast that they'll need more equipment for those factories. And so it's just a -- since it's a great solution for the AI data center servers, and the best memory for those, then it's an added demand signal for us.

Got it. So I think Applied has mentioned many times that you gained 10 points of DRAM, WFE share, right, over the last decade or so. What do you think help to drive those share gains? And as you look at the next 3 to 5 years, what can help maintain or expand that market share?

Yes. I think it's -- what we've discussed is some of the same capabilities that we built in leading-edge logic on the transistor side are being deployed in DRAM from an equipment capability perspective. And that's really what's helped the share gain over the years, and I think that roadmap continues.

So we talk about periphery, IO, logic and other elements of the architecture that require those techniques. I think that's what is helping us win positions in the forward DRAM. And we've said that if companies move to 4F squared, that will be a share increase for Applied Materials, as we have a stronger position in the 4F squared than even in 6F squared. And when they go to 3D DRAM, same thing, we expect an uplift in our share position in those because of the long lead work we've been doing with the companies on the architecture and the equipment solutions.

Do you have some sense of timing of when we move to 4F squared or 3D DRAM?

For that, we just say we should -- you should talk to customers. So I think our customers, the roadmaps have been changing. They've been adding more 6F squared process upgrades in the recent. So I think each customer has a different expectation for when they would deploy those.

Got it. Okay. On advanced packaging expected to grow over 50%, right, even faster than the overall. So if you look over the next 2, 3 years, are there certain new emerging areas in advanced packaging, where you think Applied might be better positioned too to participate?

Well, definitely. So on the 3D stacking in general, Applied has technologies that we -- that will be deployed by customers, and then I mentioned a few of them a little bit before in highlighting that we're building a portfolio of solutions for packaging. So one acquisition that we're underway on right now, for example, is for fine-line interconnects. You can think of it, the substrate at the top of the substrate between chips that are being interconnected. The x-ray acquisition that we did is to examine the quality of interconnection of micro bumps between stacked chips and allow you to see things that we couldn't see before, the industry couldn't see before, and we've been working for years on hybrid bonding.

We've been working for years on panel technology. We have lithography technologies that we're deploying in different packaging solutions. So we really feel like we have a strong portfolio, and we're examining the evolution of larger and larger systems with more and more chips, which create all these different materials and equipment problems like warpage, like thermal management, hotspots, just the ability to get the signals on and off the chips and what technologies should be used for that. Applied Materials is investing in a portfolio that we think will be very strong as that roadmap continues to develop. And we think it's a huge growth area for the industry.

Got it. On the foundry-logic side, one very large customer, of course, has been driving most of the industry growth. Are you starting to see any sense of diversification, there's an emerging new player in the industry, right? Have you started to see anything new there? Like how do you look at the diversification over the next few years?

Definitely. We said in our earnings call, I think that we're shipping to 4 customers today on leading edge and that is becoming more and more diverse and robust. And of course, that's a great thing for the industry. I think competition in the foundry business will help drive the roadmap. And from an equipment and a factory perspective, it drives more solutions. So I think that's a good thing. And we do see interest from new customers.

Got you. Okay. On gross margins, Brice, there is always this kind of good problem to have where your customers are making so much more money, right, by way of gross margin. So what levers does Applied have to kind of exert your position in the industry, right, and expand gross margins, right, from -- I mean, you're getting towards 50% now. How much more upside is there?

Yes. Investors might notice that we've started reporting our gross margins by reportable operating segment. So you can see our equipment business has 54.8% gross margins, and that's improved quite a bit over the last couple of years. Vivek, I know we've talked about -- we've been working on our pricing process, building a robust, disciplined process where we set targets for every tool. We set -- we base it on our value analysis of what the tool is providing.

And so we feel like we've done a very good job of making that a more robust process for the company, and that's helped us with our margin uplift. And I would just say that in general, Applied Materials' strategy is to work with customers on the forward technology. So when we think about EPIC and our platform that we're building, the lab that we're building in Sunnyvale, where we've announced 10 customer arrangements at this point where we have some of the top universities and all the top customers partnering with us on that platform to work on -- collaboratively work on the furthest out technologies together. That's been our strategy.

And so what that helps you connect the dots as those portfolios are introduced, our gross margin, we expect will increase over time because that long-lead work that you're doing is on the most difficult technology problems for those customers. And so that's been our strategy, and we're increasing our capability of pursuing that strategy by building the EPIC platform and having the customers join us and working together. And the simple way to think about that is your core, your newest tools and your newest capabilities and your top researchers are all there. And if we can have the customers join us there and bring their architectures and their most difficult problems, then we expect to speed up progress in that way.

Got it. You raised the growth on your Applied Global Services, AGS, business towards mid-teens. Do you think there's a point at which you see the growth rates on the product side and the services side converge? Or this is just a long-term kind of secular grower and right and it's not -- it's countercyclical to some.

Well even when it was low double digits, at that point, it was probably ahead of where the equipment is. So we do think it's secular, if you will. We think the underlying drivers are an ever-increasing installed base and those tools tend to have -- be long-lived. So when you put new tools in place, those can be tools that are serviced between 10 and 30 years literally and so it's long life from that perspective. And then we continue to announce new products in the service space.

Most recently, a lot of these products have been AI-driven, where we're using AI to help make predictive recommendations on maintenance and upgrades to the tools that help the customers with output. And so as we make new service product announcements that grows the value of each tool in the service space. So we do think that is secular and goes back to the sort of the secular growth in the equipment itself.

Got it. One question on China, Brice. It seems as if that exposure for the industry has kind of settled in this 25%, 30% type of zone. Do you think that, that's sort of the run rate from here? Or you think that it will actually come down over time?

Well, when you say it like that, that makes total sense to me because I think China had an ambition to be self-sufficient from an equipment perspective and a semi cap perspective. And the China share of global semi device demand is around 30%. So if it settles in that ZIP code, that makes sense from a long-term perspective to us. Our most recent quarter, I think, was 24% from a semi systems and services business, so not counting display. So 24% and that's about the level we'll operate in the very short term.

And then as the leading-edge grows so quickly, it will probably be a little bit smaller, as we get out a few quarters, but that's the right ZIP code.

Got it. And then on just capital allocation, use of cash. It's interesting over the last decade, we have seen analog companies in semiconductors, right, get very high multiples because of their free cash flow generation and returns. Although I think for semi-cap companies is actually not as well appreciated, right? You have also done a lot of buybacks and had added a lot of cash. But how do you think about capital allocation? Do you think there are opportunities to do M&A accelerate your growth? Or do you think it's still return of cash that will be the primary use of the...

Yes, I definitely would not say return of cash is our primary objective. Our primary objective is to grow the business. When I think of it, Vivek, our business has a greater than 30% return on invested capital, I expect that to be growing and so I think all the finance people here will be thinking, well, if you have that kind of return on investment capital, it probably suggests that you have more projects that you could do at a good return, and that's certainly the way we feel.

We're building more lab space. We expect to be able to add more projects that will be profitable for the company. So the first priority is to invest in the business and grow the business. And then to your point, there will be significant cash flow to distribute to shareholders and no change in strategy there. We do that through our dividends, which we've grown nicely over the last 4 years and our buybacks.

Are there opportunities to do tuck-in sight improve? There's a lot of talk of adding more AI-like capability, right, in kind of different parts of the business? But are you seeing any of those opportunities come up?

Absolutely. I mentioned two acquisitions that we've done just recently. So I think we're active in that way. And those will be -- when we do those, that will be to add to the portfolio and add to our portfolio capabilities. Applied has a very great interconnected portfolio, and that's what we think helps us work out on the edge of the future technology with our customers, and we'll continue to build on that.

Great. On that positive note, thank you so much, Brice. Really appreciate your time.

All right. Thank you. Thanks very much for all those questions.

Thank you for coming, everyone. I'm Stacy Rasgon. Hopefully you know I'm Bernstein's Senior Analyst. I cover the U.S. semiconductor and semiconductor capital equipment space. And it's my honor to welcome our guests here today, Gary Dickerson, the President and CEO of Applied Materials.

Before we get started, I want to remind you if you have questions you'd like to ask during the presentation, you should have a link to our pigeon hole forum, where you can submit those, and we will have time for Q&A at the end.

So look, semi cap has been pretty remarkable. We've got a renaissance in the industry over the last several years, but it's really shifted into overdrive recently as AI has gone mainstream. The demand profiles that we're seeing are calling for -- I mean just simply more, more chips, more wafers, more tools.

In that world, like companies like AMAT, the contributions that they are bringing to that world are more important than ever as materials-driven innovation moves to the forefront of process technology development and enables the industry to satisfy this incredible amount of demand that at least for now, we still have. And to tell us all about what he thinks about it, it gives me great pleasure to welcome Gary and I've been looking forward to this conversational conference. So this should be fun. Gary, thank you so much for coming.

Thank you, Stacy. Really glad to be here. Always fun to hang out with you.

Yes. like -- maybe just to start on that point, I mentioned sort of a renaissance. So it wasn't that long ago that $100 billion in WFE was seen as just like aspiration. And we've blown through it, right? We might be 50% higher than that, like this year and growing potentially like for multiyears, I mean, you guys have talked about significantly increased visibility and a multiyear long-term growth cycle. Maybe just to start there, I mean, clearly, this is all driven by AI.

AI is sort of dragging everything in the space along with it, which certainly helps you guys. And -- what is AI actually done for wafer and equipment demand? Why are we seeing what we're seeing right now in this environment? And then maybe as you go through your -- think through your -- the business and the different segments and how AI is impacting all those, whether it's logic or DRAM or packaging?

Yes. I mean, again, AI is the biggest technology inflection of our lifetimes, really -- and we're using AI inside Applied Materials.

I want to ask you about that a little later, but...

Innovation, product development, operations, supply chain, our service, engineering, process engineering. And for me, the really big driver is top line growth. I mean, certainly, we're going to be more efficient and more productive. But I will bring multibillion-dollar products to market faster, even some later this year using AI technologies, and we will make our service engineers more productive so that we can deliver higher value services and increase the compound annual growth rate for that business.

And so I think that, again, this is just driving tremendous computing demand. And for Applied Materials, we're the leader in materials innovation in the most important and fastest-growing segments that are enabling AI. So leading-edge foundry logic, DRAM and advanced packaging. Those three segments are way more than 80% of the incremental WFE spending in '26. We think that profile continues going forward.

And you talked about all of the discussions with customers, I'm in very frequent discussions with customers on delivery times, and we can talk about that. We've done a lot to improve our operations and supply chain. So we have ramp agility. But the other thing, again, I'm meeting CEOs and R&D leaders all the time is the AI computing innovations. So one thing everybody is focused on is tokens per second per watt, tokens per second is performance. Per watt is power and cost.

And again, those three segments, leading-edge foundry, logic, DRAM and advanced packaging are the most important for chip architecture innovations. So again, Applied as the leader, where we've said we're growing our systems equipment business more than 30% this year like mid-50s gross margins and continuing to go higher. So again, that's making a major difference for Applied.

And then advanced packaging is the other segment that is growing very quickly. Again, those architecture inflections, how you connect computing components together and how you move the data is incredibly important for tokens per second per watt. So again, Applied has the most enabling portfolio. We're in deep engagements deeper and longer than ever before, because we are co-innovating with our customers. So we're out 10 years in the future, multiple technology nodes and Applied is the key enabler of those new chip and packaging AI architecture inflections with this materials innovation portfolio that we have. So I've never had more fun, Stacy.

We can see that. We can see that. I want to take those 3 segments one at a time. We talk about leading-edge logic and DRAM and packaging because I do think those are the -- I agree with you. I think those are the 3 at least at this point, are probably driving the majority of what we're seeing. And maybe let's take them one at a time, maybe to start with advanced logic and foundry. What is it that you're doing? You've talked a lot about things like gate-all-around and. What is it that AMAT is doing? And how is that actually driving the business today?

Yes. So again, for AI, every node in foundry/logic gives you something like 30% power, 15% performance.

Do they still do that, by the way?

Well, nearly that, I would say. And so if you look at the transistor, Applied is by far the leader and also for wiring, it's a multibillion-dollar business. And I tell everybody in your smartphone, you have a processor chip with 20 billion transistors, 60 miles of wiring, and it costs $30. So what we do in the semiconductor industry is we're delivering miracles every year. I mean that's basically what...

As I've said, I'm amazed any of it works at all .

And so again, for gate-all-around, which is how you process the data in the transistor, there are more innovations on next-generation gate-all-around -- in the future, they're going to stack [ NMP ] transistors for CFET. In the wiring, there are tremendous innovations. Customers are also putting the power lines on the backside of the wafer, which gives them better power performance, 30% area scaling. So all of those areas applied as those architectures are adopted, we'll capture over 50% of those available markets and gain share. And so what we've said for foundry/logic is with gate-all-around and backside power, it increases our revenue per wafer start about 30% -- so we're...

You gave one. I can't remember what it was.

Yes. So basically, the combination of transistor and wiring goes from $12 billion to $14 billion and then for 100,000 wafer starts, but there's also share gains for us. And one thing I would say that is also very different, and this is when you talk about DRAM or foundry/ logic that's changed in my time in the industry. I think in the past, Applied was more providing equipment to customers. But over the last 7 or 8 years, we've built a team of integration innovators that are as good as any of our customers.

And if you -- in a transistor, you have something like 500 steps and wiring as many steps. And so there's co-innovation and co-optimization across that flow and about 30% of our revenues are also integrated systems where we're combining multiple technologies under vacuum because some of these films are an atom or 2 atoms thick. And so if you go to air, you oxidize and you damage electrical properties. So I think one thing that is really important for Applied Materials in enabling these AI computing innovations is this portfolio we have, our ability to optimize, and that's why our customers are joining EPIC. That's why we have these very, very deep partnerships with these customers, enabling AI computing innovation. So foundry/logic is certainly an area where Applied has tremendous strength, and we will grow share as these new architectures are adopted.

Got it. I'm going to get back to the EPIC center stuff and .

Okay. .

But I want to talk about DRAM now -- you've picked up -- I can't remember something like 10 points of market share over 10 years in DRAM.

Overall DRAM spending. Overall DRAM spending.

And now, I mean, clearly, I mean, if I'm looking at like one of these AI racks and I look at like just the wafer area of the semiconductors within the search, I mean, HBM DRAM must be 80%-plus. There's a lot of DRAM that that's going to be.

Oh, no question. And then HBM, you have to start 3 or approaching 4x the number of wafers because you're stacking and you have some yield loss to have the equivalent number of bits versus standard DRAM. So I mean that -- obviously, DRAM demand is extremely high. And for Applied Materials, again, as you said, we gained 10 points in a little over a decade in overall DRAM share. And Applied is by far the leader in wafer fab equipment, process equipment for DRAM. And so there, again, for AI computing, people want really fast memory. And so in the CMOS logic, they're innovating with metal gate and new versions of metal gate where Applied, again, has very, very high share to go faster. They're moving to FinFET, where again.

So the logic portion of the DRAM.

Logic portion of the DRAM because, again, how you move the data is incredibly important. So those are all areas where Applied has tremendous strength. So -- and again, we're in these multi-node, many year engagements with these different customers. We have a great portfolio of products. And we're also in these high-velocity co-innovation relationships with customers.

So as they're innovating with the CMOS logic for higher speed, as they're innovating for vertical channel transistor 4F-squared or 3D DRAM. Again, we have very deep partnerships, just like we do in leading-edge foundry logic, where those innovators integration teams, architecture teams are working with Applied Materials creating those future architectures. So what we've said in DRAM is that, again, we're positioned as these new architectures are adopted, the CMOS logic, the 4F-squared, 3D DRAM for significant share gains, continuing what we've been able to deliver in the last little over a decade.

What kind of time frames are we talking about for like 4F-squared or 3D DRAM?

Well, I'd rather have the customers give those time lines. So people are extending 6F-squared. And then between the 3...

4F-squared will be a smaller cell size, so a higher density of the memory bits on the...

Higher performance, lower power, higher area density, all of those things. But again, the bets that people are placing are not exactly the same in terms of time lines -- so I'd rather have them talk about -- but that's coming over the next -- again, the CMOS logic is the most near term because high-speed memory is so important. And that's, again, a tailwind for Applied from a market share standpoint. And then most people are 4F-squared and then 3D DRAM in that kind of sequence. And that's going to happen over the next number of years.

And it really sort of brings -- you really are engaged, I mean, 10 years out.

Oh, absolutely. Yes, again, for these architectures to be adopted, this is where -- this is really the strength of Applied's portfolio. If you look at these inflections when we look at leading-edge foundry logic, when you go to 14A or 1.4 people use different terminology or you go to these DRAM architectures, they're somewhere between 5 and 10 key innovations that determine timing of those architectures.

Applied is by far the leader. If you look at 3D DRAM, really, the top 3 key technologies are all from Applied Materials.

So what are those technologies?

Well, I don't know if I want to go into exactly what all of those things are. But again, this is where we do this high-velocity co-innovation because in some cases, you need an order of magnitude improvement in the equipment to enable the performance, power, cost, yield of those new architectures. And that's where -- so for DRAM, again, high confidence that we're going to continue to gain share there. And that's from a memory standpoint, especially for AI, fastest-growing segment in memory. And again, Applied is in a great position. We can talk about EPIC again, how we work with people with all of these architectures.

We'll get to you next. But first, I want to talk about packaging because this is another huge -- I mean, look, as people -- Moore's Law slowing just which the transistor scaling is slowing and you have to do other things. Packaging is certainly one of the -- how do you put together these different chips in new and interesting ways. And for AI, clearly, it's enormously important. And you guys must be the biggest advanced vendor.

Yes, we are. So again, packaging, I think, is one of the most exciting inflections in the entire industry. It's really how you connect computing components together. And so I think Jensen and others, they talk about wanting to make the packages as big as they can to connect as many computing components as possible at the highest density because it's so important for tokens per second per watt.

So Applied, we have, again, a very unique broad portfolio. That business this year is growing more than 50% for Applied Materials, multiple billions of dollars. And again, we're also deeply engaged through the ecosystem on new packaging architectures. So if you look at an AI server today in 3 or 4 years, the way you connect those computing components are going to be very different than what you see today. So there, again, people want larger body sizes. They want higher I/O density. Applied has the leading portfolio in enabling those inflections. And we have deep relationships with companies that are currently leading and also companies that are bringing new architectures, new packaging architectures for AI to market in the coming years.

Is this like panel or?

Panel is definitely one of those architectures that people are focused on. Again, warpage is an issue for packaging. So if you want to have higher I/O density, dealing with that is very important. And then just getting a larger body size. I mean, if you look at...

Glass substrates and...

Glass substrates or if you look at some of our largest customers, tech symposium, they talk about a number of reticle fields that you can connect in a single package. And so this is really important technology. And again, Applied is the leader. We've been investing for a number of years. We knew these inflections were going to have an enormous impact on AI, energy-efficient computing. And so again, over 50% growth this year, and that will be a very high compound annual growth rate for Applied going forward.

And the visibility that you have now seems better than probably -- I don't know if ever.

Ever.

Is it ever? Yes. I can what you said are you getting like 8-quarter like rolling forecasts and...

Yes. Yes. So I'd tell you the visibility we have in the technology road maps because we're co-creating those road maps is better than ever. And also from a demand standpoint, again, frequent conversations with customers on delivery times. And so we do have 8-quarter forecasts from every one of our customers and longer commitments from the customers. What's really important for us, again, we did anticipate that WFE could grow a significant amount.

So we made investments to nearly double our operations capacity. But in the supply chain, you also need the lead time so that we have that ready to ramp. And so for customers, it's not only that visibility or orders sooner, it's also exact configurations because you need to know what components in the supply chain you need for customers. So for us, for us to be able to ramp to meet the need, again, we're getting much better visibility from our customers than ever.

Got it. And I guess that gives you -- people to talk about a multiyear.

Yes.

Sound pretty confident of that.

Yes. No, look, I think that what we've been seeing is that computing demand is continuing to increase. Recently, people are talking a lot about Agentic AI. And so Agentic AI is layering on top of the demand that was already there. And that's more weighted to CPUs. The CPU, GPU ratio is more weighted versus where we've been. And then also DRAM is up higher, NAND is up higher, what we're modeling is 90% of the incremental WFE is in the leading foundry/logic and DRAM. So again, and then after Agentic AI, you have physical AI, and so.

They never stop it. How much of a constraint is clean room space? I had this view that like as strong as this year is this is -- we might grow WFE, say 20% this year. I know you guys have not given a WFE number, but the growth is going to be strong. But it's a constrained year because we don't have the clean rooms and they're coming online.

I guess how many -- you guys always talked about you track that, how many fab projects are you tracking? What kind of clean room space is coming on. And I don't know if you have a point of view on where growth could be if like clean rooms right now were unconstrained. Like how much unconstrained demand is actually out there?

Yes. I don't -- again, we certainly have a forecast for where we think WFE is going, base case, bull case, bear case. And it's been hitting at the bull case, pretty consistently.

I bit objectively even the bear case probably isn't that.

No, absolutely. No, absolutely. So we're tracking over 100 fabs. As you can imagine, there are a lot of incremental spending in the areas that are the fastest growing. I said over 80% is in those 3 areas. So that's basically what we're seeing. And I think relative to -- obviously, with 8 quarters, we have great visibility into '27. And from my perspective, I think AI, again, really changes how we work, how we live. I look at -- I told you earlier how we're using AI inside Applied Materials. The ROIs are tremendous. And we can see already that we are accelerating product time to market. So I believe the demand -- this is a multiyear wave that Applied is in the best position because we're in the -- we're leading in the fastest-growing segments that are enabling the tokens per second per watt.

Got it. Got it. So let's talk about this co-innovation with customers. Tell me about the EPIC center. So it's coming into its own now.

It is. Yes, we've announced 10 partners for EPIC. We have TSMC, Samsung, Micron, Hynix, Broadcom. We have Advantest, SCREEN, some universities. You'll see more announcements coming. And again, this is what I said earlier relative to the chip and packaging AI architecture inflections is incredibly important for the ecosystem, but certainly for our customers because whoever is first to market with design wins, that has an enormous impact on their business. So Applied, we have these new innovations that will enable these new architectures in EPIC. And so for customers to have first access to those innovations, like I said, some of these technologies, you need an order of magnitude improvement or the architecture won't happen. So having their innovators locating.

How does it work? So they have personnel...

Absolutely.

Facility working with your personnel to developing their processes that they're bringing into production.

Yes. And again, it's really this co-innovation, high-velocity co-innovation concept. So we're -- we have customer reticles. We're focused on enabling those architectures, as you can imagine. And by the way, we focus on high velocity and secure innovation is incredibly important. So we firewall innovators between the different customers, and we've been doing this for a while. But now having those people co-located, especially, again, in Silicon Valley within 50 miles, I think, is 40% of the S&P 500. And so if you think about materials to systems innovation through the technology stack, which is more and more important when I talk about packaging or talk about chip innovations, those kinds of things, -- having these people co-located is incredibly important for velocity because you can move in parallel versus a serial process.

So our goal really is to accelerate the time to market significantly, incredibly important for our customers. And then for us, being designed in with our equipment and our advanced services for those architecture inflections, obviously, is really important for our growth going forward. And the other thing I would say that's a real advantage for us is our visibility into those road maps, where to invest if we have -- if we're creating those architectures, -- it gives us a great idea how to optimize our R&D. And again, for customers, not only is it important for their design wins, but their R&D efficiency. If you can bring these architectures to market because every one of them costs an enormous amount of money, there's an incredible efficiency. So this co-innovation, we have very deep partnerships through the ecosystem. And EPIC, again, this is where the key materials innovations for chips and packaging will first be available, and we don't have an infinite number of innovators. So having people co-located there really increases that velocity.

Stuff they're working on in EPIC, how far out is it?

Oh, gosh. So I mean, we -- again, we have incredible visibility. We know performance yield of every one of these different partners.

Stuff that's going to be in production like in 10 years or?

Yes. I mean we're out to -- I mean, N2 is ramping now. Next is A14. We're doing A10, A7, A5. So again, I talked about these miracles, Stacy, that we deliver in this industry. And so we're working on those miracles that enable those future architectures or again, the DRAM road map. I mean some of these technologies are extremely compelling for the AI computing, but they're also incredibly challenging to create the innovations that enable those architectures.

So we're working 10 years out in the future, multiple technology nodes. And again, for us, it's being designed in with our equipment and services. Also, it creates a deep strategic relationship with these customers. So when I'm with the CEOs of our customers, we're focused on those future technology nodes. And for them, it's design wins in certain time frames, technologies that they need to hit those road maps that is really essential for their business.

Do you need other players' tools in there as well? I mean, I assume there's litho and other things in.

So we do have partners that are -- some announced, some that aren't announced relative to those innovation flows. The great thing for Applied is we have more of those innovation technologies than anybody -- it's not just the strength of our -- people talk about deposition. Again, we have technologies that are completely unique, epi, PVD, in addition to the rest of our deposition portfolio. So creating the materials. People really also don't understand the modification of the materials. So that's a multibillion dollar business for us and then there's shaping and then also the -- our -- we're the world leader in eBeam technologies for analysis of the materials.

But that combination of technologies enables you to create these future transistors or wiring or memory or packaging, all of those things. So I think this portfolio strength that we have -- and the way we're engaging with customers is really unique versus where we were, let's say, more than 5 years ago.

Yes. Now that makes a lot of sense. I want to talk about the services business. And I guess maybe you can talk a little bit about how it's changed over the last 5 to 10 years. I know there's a lot more you talked about recurring. You talked about use of AI. I mean, this has got to be an area where we're -- so how has this business changed? And -- maybe talk a little bit of what the services brings to you and to your customers? .

Yes. So services, right now, we're growing high teens compound annual growth rate. It's a little over 20% of Applied Materials revenue. And we said through cycle longer term, we'll grow mid-teens. I think there's an opportunity for even to drive that faster over the longer term. As you can imagine, for customers, one thing that's super important right now is output per square meter. Again, so...

Square meter of fab space.

Absolutely. The more output they can have, the better -- so yield is really important. Edge die yield is really important. And Applied, I really love this part of our business. We've driven tremendous service innovations. Over 2/3 of our business are service agreements and prescription or subscription revenue. So that's been growing actually faster than our overall service business. And we have over 35,000 chambers connected to AI servers in customer fabs and the majority of those are remotely connected. So that is really important because, again, as we're bringing these new service technologies using these digital solutions, we're optimizing output.

Chamber matching. That's a really important technology. So there are hundreds of thousands of opportunities per year. When -- and again, we're using AI to optimize with all of these different parameters for all of our process tools. But then once we make one golden in high-volume manufacturing, you want to make them all golden. You want the biggest process window to give you the highest yield.

And so we're innovating there with these service technologies. We're also innovating with predictive models versus reactive corrective maintenance. Again, all of those things, I think, are great opportunities for us to grow this. What we said is, again, kind of mid-teens growth rate going forward. It's a little over 20% of Applied revenue today. And I really believe, again, the value of the services are increasing as you're ramping these complex new architectures, great opportunity for Applied.

Got it. How much of that growth is like -- because it's an installed base business with just the installed base growing. And some of it is this content per tool, I guess.

Revenue. Yes. Yes.

How do those contribute to this? And are either accelerating? I got to imagine maybe the revenue per tool.

Revenue per tool is growing faster than the installed base. And again, these services as we're -- and again, this is where I'm also focused on AI. In some cases, where the dollar per task or hours per task were improving many, many, many times. So for me, the real important part is not are we saving thousands of service engineers. The important part is I can deliver high-value services and scale that much faster and drive the top line growth with those technologies. So again, really fantastic opportunity for Applied.

Got it. Got it. I want to talk about China. There's a few things going on there, clearly. Number one is there's been regulatory and other issues that have impacted your abilities as well as your peers to sell everything you would like to sell in.

Yes.

Which is -- there's also the growth of local competition. I got to be honest, like one of the biggest questions I get is what is the impact of some of these local players. I think etch and deposition are 2 of the areas where there's probably like a larger piece of the TAM is satisfied by the local guys. And as I would say, these are real companies there. They're not jokers, right? Just maybe talk a little bit about what is going on in China. What do you see on the competition front there? I guess anything you can tell us on the regulatory front one way or the other? I think there's some other stuff coming in the MATCH Act and other things that may be coming. So how should we think about China?

Yes. So '25, there was a large increase in restrictions. We had said that our business was restricted at about 10%, more than double in '25. So that did have a big impact.

China sales were still very good.

Yes. And so for today, for us, it's kind of mid-20s as our semi equipment and service business. So for us, China is really an ICAPS business, the IoT, communication, auto, power sensors. And this is where Edge AI is also a driver for that particular market. So in China this year, and in ICAPS globally, we believe that business will be flat to slightly up. So...

How much of your foundry logic is ICAPS today, by the way?

Well, we haven't -- we have said in the past, it was kind of equivalent. But actually, again, going forward, the leading edge driven by AI is growing much faster. So we think over time that ICAPS will grow kind of mid- to high single digits. And if you look at actually data center, wafer starts, this is an interesting statistic. Our -- will pass smartphone wafer starts, we believe, next year. So these large die, you're driving a tremendous growth.

So again, the growth rate for the leading edge is faster than the ICAPS market. But again, for us, that business is kind of flat to slightly up. We do have innovations. We started our ICAPS group. I remember April 12, 2019, because I thought that was a really good strategy for Applied. We have a great portfolio there. We're bringing new ICAPS innovations to market, new products that expand our total available market, new products in large segments that improve our competitiveness.

So we are driving innovations there. We have deep connectivity with customers on architecture innovations in power electronics, this co-innovation, sensors, photonics, a number of different areas where we're engaged. So I think, again, that business I have high confidence that we'll perform well there over time, but the growth rate is not going to be as fast as the leading edge, which is driven by AI.

Sure. To go back to China, the competition front, the low...

Yes. So again, that's where we're bringing these new products to market. And -- if you look at where we were able to compete, if you take out the restrictions, we performed well in China. And I think that with the pipeline of products that some later this year, some over the next 24 months, we'll expand our total available market. We have products that will improve our competitiveness. So I think where we can compete, I feel good about our ability to compete.

Can't compete everywhere, unfortunately. .

Unfortunately, yes. .

I want to talk about margins. So -- and I said this to Tim yesterday, but I always ask you the same question. It's always why do your gross margins have to start with the 4. And I don't have to don't anymore, don't start with the 4 anymore. I guess what's gotten you there, number one? And then number two, how should we think about the evolution of that margin structure going forward? There's a whole bunch of drivers. There's clearly operational efficiencies that you guys are driving. There's mix. Maybe there's pricing, like I don't know like for sure. So like how do we think about that?

Yes. I think that if I look at our conversations with customers, they're very different. Now it's about delivery times, access to our technology innovations to enable the new architectures, -- so we have been growing margins pretty consistently. I think you're going to continue to see us growing margins, both gross margin and operating margin a fair amount as we keep going forward. And so again, it's really the value that we're delivering in pricing. We have been increasing pricing. I think one thing that...

You've been increasing pricing of like stuff you already sell? Or is it more on like new.

Both. Yes. And so -- and again, different for different situations in terms of how we optimize all of that. But again, what's really important for customers is that we are able to make the investments in our operations, supply chain and infrastructure for the deliveries. And what's incredibly strategically important for them is the investments in the enabling technologies for these AI compute architectures for chips and packaging. So again, those are the discussions that we have. And then for me, what I think about is winning these architecture inflections and creating value, if we're creating value, we also have a great opportunity to capture value.

And one other thing I would say in the ecosystem, the profit pools are way larger than they have ever been. And so again, that gives us an opportunity to create value and share value with our customers. And again, I feel really good about our positions in these future AI chip and packaging architectures -- and we have an incredible pipeline of numericles that will enable these architectures and give us a great opportunity to create and capture value.

Got it. Maybe on the value capture. You talked some about like integrated tool sets. So I think you said some of it. So does that percentage go up over time? I have to imagine is this stuff features get smaller and this stuff gets harder. You're not really just selling a single process. You're literally selling a solution. We want to create a film that's this thick and it's conformal, and this and it takes 10 different processes to -- and then how do you -- like how do you think about capturing that incremental value versus sharing it with your customers? .

Yes. So I talked about the 60 miles of wiring, which is kind of mind-boggling. When you think about moving data with almost no resistance, through a wire, and it's even going higher than that. So some of these platforms, we have 7 technologies integrated under vacuum because, again, -- if you go to air, you can oxidize those few ADAM interfaces. So that business of our business is growing.

And the the number of technologies that we're integrating is also growing. We announced some new ALD technologies. And then, again, in those technologies, the surface interface is really, really important for electrical properties. Our PVD business, combined with selective ALD and CVD and copper reflow and all of these kinds of things.

That's a unique capability Applied has to enable these future architecture inflections -- and then it's not only the integrated products, the strength of our portfolio is our ability to optimize across these modules. So there's co-optimization to enable this tokens per second per watt across the portfolio. But the integrated is about 30%. The number of technologies we're integrating in the platform is increasing and super strategically important for customers for these architecture innovations.

Got it. I guess on that note, like I always think about the semi cap industry, I mean it's competitive that everybody kind of has their own niche. But at the same time, you clearly do compete -- I'm going to leave the Chinese guys out of it, but -- you got the Lams and the Tokyo elections of the world -- what is it that customers are looking for when they're choosing a new solution? Like what is that -- do -- what does that bake-off process look like? When does it happen? Is it the new node transition what is it that customers are looking for when they decide to actually award the process of record to you versus your competitors? .

Yes. So I think the most important thing for customers is the race for these new architectures. That is the most important thing. And whoever -- so when they're competing for design wins, they care about performance, yield and reliability. That is the most important thing. And when their customers are evaluating them for design wins, if you don't have performance yield and reliability, they don't care about the cost because they can't risk their system architectures on those technologies.

So for Applied, we're working through the whole tech stack and working with these customers on these new architectures, that is the most strategically important. I mentioned high-speed DRAM with the CMOS logic or any of these different types of inflections. So the first thing for Applied is again, connecting with them on what's critical for their design wins -- and then inside of that, you have a portfolio of solutions where Applied is driving innovations in each one of those different pieces or those integrated platforms.

But that connectivity, I think, is more and more and more important. So when we're engaging with someone on an N plus 1 architecture or an N plus 2 architecture, we're really focused on the electrical, like resistance, capacitance, threshold voltage or high-speed memory or those kinds of things. And then the technologies that enable those key performance, the tokens per second per watt and then there's a portfolio of Applied solutions in key unique Applied solutions that enable those technologies.

So again, the great thing for us, we have leadership -- we're in great positions in the fastest-growing segments that are enabling AI computing in leading-edge foundry logic, DRAM and packaging. So again -- and then the other part of our portfolio that is actually growing very fast -- this is one of the fastest growing businesses in Applied is our inspection and measurement business.

So we said our semi business is growing over 30% this year Actually, that part of Applied Materials is growing much faster. We're the world leader in eBeam technologies. We have the lead in resolution and imaging speed with cold field emission. That will be over $1 billion in revenue this year. And we have an incredible pipeline Stacy of new products that are coming over the next couple of years. So I have high confidence. That one is one of our fastest-growing businesses. The revenue growth there is going to be multiple billions of dollars. But the other thing that's really important is that when you're -- when you're building all of these new architectures, the learning rate is crucial.

So Applied's eBeam technologies, we can see into those architectures and collect data, orders of magnitude faster. So again, that connectivity with our leadership and the materials innovation is also strategically important for Applied when we're engaging with these customers on the architecture innovations.

That makes a lot of sense. -- one other segment that you don't talk that much, it's small, but like why do you still have a display segment. What strategic value does that play for you? .

Yes. So display today is a little over 20% operating profit. We -- and it is growing at a decent rate. The biggest opportunity there for us is we do have an opportunity to enable a new OLED architecture for IT and TV. And so there has been a technical barrier. So today, you have single-digit adoption of OLED in those segments of the market. Applied has come up with an innovation. We're working with the leaders that overcomes that limitation. So it would take some time for that adoption. But I believe that, that can be a good growth rate for Applied, expanding the operating profit.

And so that's one thing. Just that business by itself, there is synergy when you talked earlier about panels being processing. So if we think about our leadership in handling glass, or all of the glass processing applied is the global leader in those technologies.

We're taking that learning into these new packaging architectures. So there's synergy -- we have -- by the way, this is an incredible team of innovators inside Applied Materials. So there's that synergy with where packaging innovation is going in the future.

We've got a few minutes left as you go to the lightning round .

Sure. Let's go .

And if anybody has other questions that you want to submit, you can do that. Are there any areas where you think you're participating less than your fair share in the super cycle due to competition or anything else?

No. Again, I mentioned earlier, we have really great visibility in the architectures, chip and packaging architectures that will enable AI computing innovation, the tokens per second per watt. So I feel great. And again, the really great thing for Applied is that -- we have incredible visibility because we are working and co-innovating and co-creating these architectures through the tech stack and through the ecosystem.

So we are investing in the areas that we think are going to drive the highest growth. We've made some small acquisitions. It's not possible to do the large acquisitions with the current situation. But there are areas where that can add hundreds of millions of dollars of growth and create synergies with the rest of Applied Materials. So I feel really good about that.

Got it. Here's an interesting one. Is Huawei's logic folding economically real or road map theater.

Well, I don't know if I want to comment on that. What I would say is that there's this concept of design technology co-optimization. Some of our largest customers have talked about that. You're moving the power lines from the front of the wafer to the back of the wafer. You're getting a 30% area savings, better power and performance. You have isolation walls in the transistor -- so there are those kinds of innovations that are being driven in the industry.

And so I would say this is kind of along the same lines, and one of our largest customers, they talk about how the percentage of their innovation enabled by design technology co-optimization, going up significantly, which is, by the way, great for Applied Materials. But that particular one I think it's too early to tell. I mean you have thermal issues, yield issues, many different kinds of things that are yet to be determined.

By the way, that's using bonding technology. Applied has the leading hybrid bonding technology and an integrated platform. So as those architectures are adopted, we also have innovations there.

I think it's fair to say that those particular architectures are not unique to Huawei or the industry is looking at.

No, if you look at even like future transistor technologies, you're stacking NNP transistors. So it's really going more vertical and -- or like, say, power lines or transistors or all of those kinds of things or CMOS bonded to the array in memory. So separating out those IP blocks and connecting them in different ways is a trend that the overall industry is focused on.

Got it. Maybe one more. Do you think there's a disconnect between spending expectations from the hyperscalers and the labs versus what the semi industry can realistically deliver.

I feel very good about demand going forward, I would say. I do think, again, this is going to change how we work, how we live AI is going to be an enormous inflection. That's going to drive tremendous computing demand and the need for computing innovation and tokens per second per watt.

And Applied, like I said, we have made investments in our operations so we can scale our operations. It's really making sure that we have that alignment with customers. We have to have that early visibility to ramp our supply chain. So I feel good. I mean, we've made enormous improvements in operations and supply chain over the last few years, and we're in a way better position than we've ever been in that aspect.

Got it. So we've got about 1 minute left. I'll close out the way I always do. We've got a full room here, Gary. Why should they buy your stock?

We're in a great position. The fastest-growing areas in the industry, leading-edge foundry, logic, DRAM, packaging, that's over 80% of the growth in WFE. Those are areas where Applied has clear leadership. And those are the areas that are continuing to grow significantly over the next several years. And as I mentioned, our connectivity, our relationships with our customers are deeper than ever and critical to them winning designs with their customers.

So those future AI chip architectures, packaging architectures, Applied is in a great position to gain share, create value and capture value. So I have high confidence the growth rate for Applied is going to be very strong, both top line and bottom line going forward.

Got it. I think that's a wonderful place to leave. Gary, thank you so much. .

Thanks, Stacy. Thank you, guys.

All right. Good morning, everyone, and welcome to the third day of JPMorgan's 54th Annual Technology, Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Tim Deane, Senior Vice President at Applied Materials. Tim heads up Applied's Global Services business, what we call AGS, represents about 20% of Applied's overall revenues, drives a stable, but very high-growth services franchise, which is a key part of the systems-level solutions they develop and deploy to the world's leading semiconductor manufacturers.

Tim has been Applied -- been with Applied for over 30 years, in charge of AGS for the past 3 years and previously worked in the Semiconductor Systems Group for more than 25 years, leading the field operations team, business management, strategy and customer business and planning team. So Tim, thank you very much for joining us this morning.

Yes. Nice to be here, Harlan. Thanks.

We're going to start off at a high level. The team just reported very, very strong results and growth outlook last week. So I'm going to start off there, but we are going to touch upon Tim's AGS franchise because it's just -- it's a great ratable, highly profitable cash flow generative franchise. But starting off at a high level, team reported strong results outlook last week.

On the better revenue growth outlook for this calendar year, I think you guys are now calling for 30% growth in your systems business versus your prior growth outlook of 20%. On the incremental upside this year, is it being driven by new brick-and-mortar greenfield programs being pulled forward? Or are customers just accelerating technology migrations on existing capacity? Or just solidifying plans and now sort of locking in sort of tool slots, right?

And so trying to figure out like what drove that sort of incremental upside over the last 90 days? And then can you just talk about which end markets, advanced foundry logic, DRAM, advanced packaging contributed most to the sort of incremental improvement in the outlook?

Sure, Harlan. Happy to talk about that. So there's -- I would say there's not fundamentally a pull-in from '27 into '26. There's a lot of brick-and-mortar being built out there, greenfield facilities. So there's a pipeline of projects that are coming online. To the extent that customers can accelerate them, they obviously want to do it as quickly as possible given the environment. But there's a lot of creativity going on in the existing spaces out in the factories globally today.

There's at least one case where a customer procured a completed shell from another customer. And obviously, they're going to put product into that as quickly as they can, which helps us with our business. But the other areas that we see are primarily in-fab changes. So if customers are looking at their full production lines, if they see pinch points in their production, maybe an older generation tool that's a lower throughput that's limiting the output of the factory, we're seeing lots of cases where customers are coming to us and saying, okay, we're going to remove this platform. We're going to replace that with a higher productivity platform, which is good for wafer fab equipment.

Additionally, we see cases where -- or there's at least a case where a 200-millimeter factory was being shut down and repurposed into a packaging factory. So you were asking kind of which areas do we see the growth. Packaging has got intense growth pressure in demand in end markets. So we're seeing customers being as creative again as possible to get capacity in as quickly as possible.

And then we see another example where there's an older generation 2D NAND factory that's being converted to a DRAM factory. Again, DRAM, advanced packaging are kind of themes that you will hear over and over again where customers are trying to get more good die out. So that creativity is leading to these incremental upsides that we see. And then just from a services perspective, interject, as we work with customers across all their facilities, I think in every place that touches AI, those customers are coming to us saying, how can we optimize output for the factory, which is kind of driving the service business as well.

Yes. I think that's a little bit under the radar screen for most investors is that we all tend to think about greenfield capacity. We all tend to think about technology migration. But as you pointed out, there's a ton of installed capacity out there where throughput may not be as optimized, yield may not be as optimized, right? And any little improvements in current factory throughput or defect density improvements can have a pretty significant impact in terms of output and good die per wafer, which ends up being millions and millions of dollars for their customers, right?

No, that's a good point. If a fab is fully installed and that's operating, every percent of utilization improvement that you can make in a factory is a huge lever for productivity for customers. And as we partner with them, particularly in the factories, whether it's with upgrades to existing tools, placements of key tools or just service optimization, these are all kind of win-win scenarios that we see with customers. So it's a great environment out there to be working together really closely.

And at earnings, the team called out having historically high visibility, 8-plus quarters type of visibility to your backlog, customer forecast. And this gave the team the confidence last week to qualitatively talk about continued strong growth profile in WFE spend '27 and '28, right?

And in line with that, Brice talked about the Applied team having 100-plus projects, programs that are on your radar screen. These projects sit at different stages, some near-term ramps, some longer-term commitments. Some of these programs are technology migration focused, greenfield build-outs. What's the rough mix of this 100-plus project pipeline, right? Is it technology migration more biased? Is it greenfield capacity biased? And how does this pipeline sort of convert over the next, call it, 2 to 3 years?

Yes. So just the first part of your question about the 8 quarters visibility, I think -- those of us that were around post-COVID during that ramp, there was an awful lot of learning that happened during that period. In my prior role, I was kind of at the nexus of that with Applied working with customers as they were trying to kind of plan capacity on what was kind of an unexpected ramp.

This time, it's a little more of an expected ramp because we know with AI and the Agentic components of AI now that are coming online, there's just huge demand across, in particular, leading logic, DRAM, HBM and advanced packaging. Those are the ones that we see as kind of the primary drivers. So it's in our best interest as a supplier and a customer to collaborate as closely as possible because we want to make these transitions smooth.

Bringing up these factories is extremely complicated. We or me, I'm hiring people across the globe in order to do installs, meeting customer schedules. So the collaboration is coming naturally, I would say, at the moment, particularly with our largest customers because it's in our mutual best interest to do that.

Now on to the pipeline. So when we look at the pipeline, 100 projects is a lot. And I think Brice also mentioned, 10 or more that's come fairly recently. The biggest part of the greenfield capacity that's coming online is actually in the advanced logic and DRAM spaces because there's just not enough physical capacity today. There's so much silicon that's needed for these advanced technologies that it's really being driven by the greenfield space.

I would say advanced packaging is in the same boat, so to speak, just because we're moving from something that's been relatively straightforward for decades, we're moving kind of the front-end type processes into the back end, which is, again, requiring more physical space in the factories.

NAND is a little bit different. You get so much leverage on a NAND wafer whenever you upgrade. So as we're present in all the NAND factories around the world. We see the wafer starts have kind of dropped a little bit over the last couple of years in NAND as customers have converted from one technology to the next. So it's a little more complicated. The technology -- the wafer starts drop a little bit, but the bits go up significantly.

So there's a lot more leverage that you get with upgrade NAND as compared to the other spaces. We've done some analysis, a typical, say, HBM wafer versus a NAND wafer, you're getting somewhere between 40 and 50x the bits on kind of apples-to-apples comparison for an SLC NAND. If you go to quad level, you're quadrupling that. So we think there's just a huge amount of capacity, and it's very efficient for customers to do that as conversion. Now I think there will be some greenfield NAND over time, which is great for us. We're very -- we're actually kind of excited about that as well. But we just see the leverage in the other 3 spots for greenfield.

Got it. And semiconductor industry is on track to drive over $1 trillion in revenues this year. I mean it was just a couple of years ago that we were all talking about a $1 trillion market by 2030. And on your recent -- these are very valuable sessions, but in your recent Master Class, you brought up an important insight, which that the mix of leading edge -- the mix of spending was longer term thought to be 1/3 leading-edge foundry/logic, 1/3 memory, evenly split between DRAM and NAND and 1/3 sort of mature and specialty analog power products, which you guys call your ICAPS business.

But given the rapid growth AI and data center compute, networking and memory, which biases strongly towards leading-edge logic and memory architectures, there's now a strong divergence, it feels like in growth between these various segments. So help us understand like how do you see -- is there a new way to kind of think about the mix of spending by markets, not only this year, but over the next kind of few years?

Yes. So for this year, we think about 80% of the incremental wafer fab equipment spending is really in those 3 areas that you talked about, the advanced foundry logic, DRAM and advanced packaging. And that really is driven by the AI demand. If you look at the various waves that have come up over time with compute and then to mobile and now into AI, there are different focuses for each of those areas.

ICAPS is still a very important market for us. And I would say we're -- I think Brice made the comment that we're incrementally positive on it compared to where we were, say, 3 to 6 months ago. We think it's kind of flat to up both China and non-China. But the bulk of the spend is really going to be in those 3 focused areas where Applied is #1 in advanced foundry logic. We're #1 in kind of DRAM in a lot of areas and then also for the advanced packaging.

Again, going back to the -- you guys held a great Master Class on transistor and interconnect architectures, right, on current and next-generation platforms. One of the big differentiators in my view, at the transistor level is Applied's what you guys call integrated material systems, right?

That's right, IMS.

So various aspects of the gate formation or the interconnect formation, you've got a tool that integrates up to like 7 different processes into a single platform, right, surface treatment, etch, deposition, clean, anneal, integrated metrology and so on, right? And these integrated solutions now represent about 30% of Applied's overall system sales. Obviously, the benefits of IMS is not only technology enablement, but as you could appreciate, better defectivity, better -- higher throughput, lower overall system footprint, it seems like a big differentiator for Applied, but why is it that the mix of IMS-based platforms hasn't increased that much over the past several years? And how does IMS create opportunities for your AGS franchise?

Sure. So I do think IMS is one of the things that's really -- it's unique for Applied Materials, right? We have a very broad connected portfolio of products. And the ability to bring them together into a single mainframe where you don't break back and you don't expose the wafer to ambient is, in some cases, it's very critical. I think in that Master Class, if I counted correctly, there were 4 IMS platforms that we talked about, right?

There was Trillium that you mentioned for gate formation. There was an Epi and etch combination for forming the contact that was talked about and then 2 versions of copper berries integrated tools for the super tight pack lower layers is one configuration and then kind of the mid-layers is another configuration.

So from Applied's perspective, we will work with customers as closely as possible to integrate steps that make sense to integrate because it does drive complexity on a single platform, as you can imagine. What used to be a single PVD platform Endura now is a 7 different applications. So managing that platform in production and just kind of redundancy on the platform, you want to optimize for where that's really needed. And it's really these absolutely critical steps that we do that.

The other thing we do at Applied, again, because of the portfolio is we co-optimize applications. And that's another big piece of the business. So they can be sequential steps or nonsequential steps that still need to be co-optimized because they interact across multiple layers. I think a good example of this is we're seeing great synergy between our PDC group, our metrology inspection group and our development teams, in particular with PROVision, where you can do thousands of measurements across the wafer, we can optimize processes faster than we have in the past.

So we tend to look at it pretty holistically, where it makes sense to do an integrated platform with a customer, if that's the demand, then we will do it. And we are constantly co-optimizing applications kind of into the flow where it makes sense to give the customer a little more flexibility. So it's not really about increasing that number. It's really finding the optimal space in the flow. But again, I think this is one of the areas where Applied is truly unique in the industry because of all these capabilities that we have across different product lines.

And complexity -- system complexity in my mind, means good things for the services organization that supports that. Is that a fair -- is the service intensity a bit higher on these IMS platforms?

The service intensity is higher on the IMS platforms for the reasons that you stated. If you think about -- just think about parts, if you had a 7 or 8 chamber, 9-chamber Endura that was all PVD, there's a lot of commonality in the parts. If now you have an ALD and an anneal and you got CVD and PVD, those are all kind of unique capabilities. So it causes us to prepare differently with customers to support those tools to make sure they're getting maximum output in the factory.

Your DRAM revenues were $1.7 billion in the most recent quarter, up 18% year-over-year. The team has roughly gained 10 percentage points of WFE-related DRAM share over the last decade. The next 2- to 3-year DRAM road map is meaningful for Applied, right?

Yes.

6F-squared continues with its high-volume ramp on the next-generation 4F-squared and then eventual move to 3D DRAM architecture, Applied has been pretty consistent that materials intensity increases meaningfully at 4F-squared and especially at 3D DRAM. Can you just frame for us the share opportunity for Applied in 4F-squared specifically versus where you sit today at 6F? And is the right way to think about it, given the historical share gain track record that maybe Applied gains another, call it, 3 to 5 percentage points of WFE DRAM share at these upcoming inflection points?

Yes. So let me start by putting a little plug in for Master Class because on June 25, we are going to do a DRAM advanced packaging masterclass, kind of the level of detail that you saw with the advanced foundry logic. With 6F-squared, in particular, we see there's a lot of runway. Customers are pushing those technologies. Again, the demand -- Manish is coming up next. I'm sure he's going to talk about the demand in the end markets is pretty incredible.

So when you have a technology, you want to extend it as long as you can. And the place where we see the road map going for 6F-squared is really right into the sweet spot for Applied's portfolio. There's going to be more advanced wiring. We also see that the transistor formation is moving more to the advanced style that kind of moved into advanced foundry logic a few years ago. So we're able to take that knowledge, the experience on the tools, the productivity and cost down benefits that we've seen by optimizing those tools and move those into the DRAM into the next couple of years.

When we start talking about 4F-squared and 3D DRAM, again, we just -- we see that the materials engineering intensity on those applications going forward is also moving into the Applied space. And this is one of the fundamental reasons why we created this EPIC platform. So we've announced a number of customers, Samsung, Micron, Hynix, TSMC last week. Advantest is joining as a partner. We have universities coming in, RPI, ASU and Stanford. And just this morning, we announced that Broadcom is joining the EPIC platform as well. They're specifically advanced packaging -- they're specifically interested in advanced packaging.

And these processes today are so complicated, it takes an ecosystem to essentially bring these to market. So I think there's recognition that partnering in this vehicle, which is EPIC for Applied is going to be a way to accelerate that. And our goal is to take what was a 10-year development pipeline and ultimately cut it in half by bringing everybody into the same facility and co-optimizing in an environment where the innovator is there, the customers are there, the customers' customers are there, industry partners are there, just to fundamentally change the way that development is done.

And from a service perspective, I view this as the best thing ever because historically, when we've done development with customers, we've done a demo in our facilities, a couple of wafers or chiplets. Now we're going to be developing a process with a customer in a facility where we can put our AIx capability around it, our eco solutions around it. We'll have our service folks there working on developing a fingerprint on these brand-new tools so that when a customer puts it into their R&D facility, we can fingerprint it immediately, bring it up faster, increase speed to market for customers.

So it's a whole ecosystem from the upfront R&D process pure research, all the way through how do we optimize it and get it up into production faster for customers in their R&D and ultimately in the HBM facilities.

Yes. No, I think now is actually a great time. So let's focus on your AGS, your services franchise. As the Head of Applied Services business, you're in contact with all of your major customers. I mean what are their priorities right now? And how is the Applied team helping them out?

So the priority -- in a word, priorities are output. It's good die out. And so it's not just optimizing throughput on an individual tool. It's literally optimizing good die out on every single wafer. So we're leveraging some of the capabilities that we've been developing over the last 10 years in AGS, specifically the AIx platform, which is actionable insight accelerator. This is the way that we bring AI, predictive models, digital twins, recipe optimizers.

This is the way that we bring these to customers in the factory on their tools. So we're working very closely with them on a project basis and a contract basis to optimize output and again, primarily to optimize good die out in this environment. So it's great for us given 2/3 of the AGS revenue today is driven by long-term contracts. So we've got really tight relationships with customers, and they're leveraging the footprint that we have in the fab to help them drive output.

2/3 of the business, long-term contracts and close to high 90s type renewal rates.

So we publish at a greater than 90% renewal rate when our portfolio and services is pretty broad. So we have kind of basic level services, warranty-like services. And then we have managed and performance services, which we really co-optimize with customers, how they manage individual tools and we try to drive output. When we look at managed and performance, the renewal rates are actually quite a bit higher even on those levels. So the stickiness of this because of the value that it provides customers is quite high. And this is a change that we pivoted to about, I'd say, 10, 12 years ago, shifting to more of an outcome-based services type solution. And yes, it's growing quite rapidly.

Your services franchise, 20%, 22% of the company's total revenue base, very, very strong recurring revenues, as you just articulated, within striking distance of 30% operating margins. Through the first half of your fiscal year, AGS is driving 17% year-over-year growth. You did raise your long-term growth outlook from low double digits sort of percentage CAGR to sustainable annual growth in the mid-teens range, right, and potentially higher at least this first year. What's driving the higher growth outlook?

So if we look at the business in the sort of the component parts, so the contract business continues to grow, and it's growing faster in the managed and performance space, which is great. That's exactly what we want with customers because we think that's where we can provide the most value. Those contracts, we are -- I think our average contract length at the moment is about 2.9 years. And the sweet spot for us is somewhere in the 2.5 to 3-year range.

So we're kind of right where we want to be from a visibility standpoint. It helps us plan better for parts and people and performance with customers when we're in that range. So that piece of the business, we're very, very happy with. The next component, I would say, is sort of our on-demand business, and that's on-demand spare parts or if people need contracted labor to come in and do some work. That's a little more tied to factory utilization.

The factory utilization is high, we see the on-demand parts going up. So that's driven it up a little bit more in the near term in combination with this continued strength that we see in the services business. And then the third component of the business in AGS, which we don't talk about too much is we have a software franchise in AGS. So the manufacturing execution system, Smart Factory, the SIM system, Applied is actually the largest supplier of factory-level software for customers.

And that's a space that we see a lot of opportunity going forward, particularly as we think about what's happening in the larger market with AI and Agentic AI. So that platform is an opportunity for us to engage with customers in different ways than we have in the past. So we actually see strength in all 3 of those, and that's why we think there's an opportunity. I think Gary mentioned in the near term to be above that mid-double digit for the year.

Your installed base of tools last 5 to 10 years has been growing at about a 6% to 7% CAGR. Your services business has been growing up until recently, 11% to 13% CAGR. Now you're forecasting mid-teens as we just talked about going forward. Installed base is accelerating. The team is also seeing good traction driving attach to more higher value-added solutions. You talked about things like AIx. I'm wondering how much of this is also contributing to the AGS sort of growth outlook, right? Last, we got an update from the AGS team. Recurring revenue per tool, which is sort of reflective of capturing more value-added capabilities, recurring revenue per tool was growing at about a 5% CAGR. Has this value capture rate actually gone up due to capabilities like AIx, remote diagnostics, digital twins and things like that?

Yes. I think the way we look at it is we are -- we have an innovation pipeline that we think of in AGS. And this consists of these AIx capabilities, supporting these IMS tools, which are different for customers than an individual tool. And then there are other capabilities, cobots and other things that we kind of have in the portfolio that we can deploy to support customers. So as we aggregate these capabilities, what we see is customers are moving up the value chain with respect to the types of service that they're buying from Applied. So more into managed, more into performance type service because they're getting more value out of it.

The other thing I would say that's really important to consider is the process windows today that our customers are dealing with on these really advanced nodes, whether it's memory or advanced logic, they're really small. I mean they're very tight. So part of our focus the last couple of years has been to find ways that whenever there is an event that happens in the factory, first of all, we want to take corrective maintenance events, extend them out. We want to move corrective to preventive.

And we do that with these predictive models that have been created because the ability to take a corrective maintenance activity, move it into a predictive means that now we can work with a customer to schedule that. So they're with moving through the factory, we can look at where there's an optimal time to take the tool down and bring it back up. But it's not just basic maintenance anymore because the process windows are so tight. So we created a capability that we call CROSSMATCH a number of years ago, and we've automated it in partnership with our business units, and it allows us to do a quick fingerprint of the tool before it goes down for maintenance.

When it's a predictive model, we know exactly what we need to do. So we've got the folks trained to come in and do that change. We bring it back up. We refingerprint it and re-center the process so that you get the maximum amount of time from maintenance event to a maintenance event. And this is incredibly important for customers because it allows them to run the tools a little bit longer. And in this environment, as I mentioned, output is king and good die outer king. So if you're not centered in the process window, maybe your edge die go out a little sooner than they would have in the past. So customers are very focused on working with us to kind of optimize that space, and that's where we're seeing a lot of the pull currently, particularly in the contract business.

Got it. We did touch upon advanced packaging. It is a relatively new dynamic for the industry, right? And an incremental growth driver for Applied. We talked a little bit about this, but you mentioned the EPIC partnerships around next-generation advanced packaging development. You have a number of memory customers. Obviously, I think they're focused on things like HBM.

But you announced TSMC, which is more the 2.5D, 3.5D advanced packaging. Today, the Applied team announced a partnership with Broadcom, who also has a plan to bring in some in-house capability on next-generation advanced 2.5D, 3.5D advanced packaging architectures. So you've got this plethora of different sort of topologies for packaging, in which case you have a big portfolio of tools that supports all of these like -- how does all of this drive service intensity for the package part of the business from an AGS perspective? And is this a new sort of facet of growth for the AGS team as well?

I think it is a new opportunity for us. I mean we're #1 in packaging in HBM, and we've got a great position in 3D SoIC in particular. And those are the 2 fastest-growing portions of the packaging market as we see it. So as those tools go into factories, it creates a new opportunity for us on service.

Historically, there are sort of front-end tools and back-end tools, and there wasn't a lot of overlap between the 2 of them. With heterogeneous integration, advanced packaging, we're seeing the front-end requirements and that complexity, the sensitivity is moving to the back end. So those customers are looking for support from Applied on the service side because we've got the understanding of how those tools need to be maintained in an HVM environment. So I think we're in the very early stages of this as we see going forward. But I do think it creates an incremental opportunity for us in the service business in addition to the great opportunity that we have on the equipment side of the business.

In addition to the strong revenue growth that your franchise delivered in the April quarter, gross margins improved 30 basis points sequentially, 120 basis points year-over-year. Operating margins grew 100 basis points to 29%. That's the highest level in over 2 years, right? And on the gross margin improvements, how much of this is more attach of some of the higher value-added services offerings like AIx, software suite, remote monitoring, which I assume is gross margin accretive. And on the strong operating margins, you're within striking distance of 30%. And I know the team has historically thought they could drive AGS operating margins longer term into that sort of low 30% range. Is that still kind of the way we should think about the long-term operating margin construct?

Yes. We think about it 2 ways. And you kind of commented on them in your question. I mean the top line growth is really all about value creation for customers. The more value we can create, the more good die out, the higher output from the factories, customers are willing to do more service work with us, which we appreciate. And this really requires deep, deep integration with the customers into their factories, really good communication, complete alignment on what needs to be done in the facilities. So as we continue to put things into the service innovation pipeline, those are things that add value. That's primarily driving the top line.

The bottom line growth is really all about efficiency. I mean we have a pretty big operation, $6.5 billion or so operation on a run rate basis. And it's -- that infrastructure is there. And the more that you put through the infrastructure, the more efficient it is. So that's very important. We have continental distribution centers on each of the major geographies. We have 3 of them around the world. They've all been fully automated now with robotics. So where we were touching every part stocking, destocking, packing, now like 60% of that is done automatically.

So it's kind of touch-free until it goes into the box. So that allows us to increase velocity of material through those. It's more efficient from a stocking standpoint for us. And it's better for customers because we can turn things around with higher accuracy and faster.

So we're pretty relentless about looking about how we drive efficiency in the business. And that's really what's going to drive the operating margins for us. So again, we think about it 2 ways. Top line is all about value. Bottom line is all about efficiency, and it's -- in this infrastructure. So as utilization has gone up in our customer facilities, we're essentially -- it's not the exact same infrastructure because clearly, we're adding, but we're driving a lot more material through that infrastructure, so it's more efficient.

I see. And for the final question, I am going to tap into your many years of running the -- being a part of the semiconductor systems business. And now that the team breaks out your semi systems gross margins, it's been a positive surprise for us and for the market, right? Almost 55% gross margins, 35% operating margins for the systems business, significant improvement over the past 2 years, has been driven, I think, by higher value as you bring new capabilities like IMS to the market.

As you look at your pipeline of new solutions, does the incremental system gross margin for your next-generation tools carry higher product gross margins? And what is the team doing to drive better cost efficiencies of your systems, which could also help gross margins for the systems business going forward?

Sure. I think as you pointed out, this is really all about value creation, value creation for customers. When you look at these complex tools like an IMS tool, it's a unique capability for Applied to be able to do this. And so they're very high value for customers.

The other thing that if you just look at the data today, in the last, I think, 3 months, we released 5 really advanced new products, not just minor changes, but quite advanced, Trillium being one of them. There's a selective nitride deposition on the precision tool. There's a treatment tool for Veeva that was part of the Master Class. These are all unique capabilities that are helping customers solve really difficult problems, so they've got high value.

So we think -- as I think Brice and Gary both talked about, long range, as we continue to see more and more of these products moving out as the technology continues to evolve, it's going to be beneficial for Applied overall from a gross margin standpoint.

Perfect. Well, we're just about out of time. Tim, thank you for the update on the high-level overall business of Applied and the great insights on your AGS franchise. Thank you very much.

Yes. Thanks for having, Harlan. Appreciate it.

Welcome to the Applied Materials Second Quarter Fiscal 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mike Sullivan, Corporate Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining today's call. With me are Gary Dickerson, our President and CEO; and Brice Hill, our Chief Financial Officer.

Before we begin, I'd like to remind you that today's call includes forward-looking statements which are subject to risks and uncertainties that could cause our actual results to differ. Information concerning these risks and uncertainties is discussed in our most recent Form 10-Q and other filings with the SEC.

Today's call also includes non-GAAP financial measures. Reconciliations to GAAP measures can be found in today's earnings press release and in our quarterly earnings materials, which are available on our website at ir.appliedmaterials.com. In addition, any comments regarding calendar 2026 refer to Q2 of this fiscal year through Q1 of fiscal 2027, which will be a 14-week quarter.

Next, I'll share some calendar items. I'm pleased to announce the second event in our 2026 Master Class series. We'll cover DRAM and advanced packaging on a live webcast on Thursday, June 25, at 9:00 a.m. Pacific Time.

Next, I'd like to remind you about our two special events during SEMICON West. On Monday afternoon, October 12, we invite you to the unveiling of the new EPIC Center in Sunnyvale, California. And on Tuesday morning, October 13, we hope you'll join Gary, Brice and our business unit leaders for our investor breakfast presentation at the Yerba Buena Center in San Francisco. You can join us in person or on a live webcast.

And with that introduction, I'd now like to turn the call over to Gary Dickerson.

Thank you, Mike. In our second fiscal quarter, Applied Materials delivered record revenue and earnings, along with our highest gross margin in more than 25 years. With rising demand and increasing long-term visibility from customers, we see an exceptionally strong foundation for sustained multiyear revenue and profit growth. The momentum in our business is being driven by three key factors: first, the rapid global build-out of AI computing infrastructure. Second, Applied's leadership positions in the most enabling and highest value areas of the market, particularly leading-edge foundry logic, DRAM and advanced packaging. And third, strong execution across our operations and supply chain.

In my prepared remarks, I will provide an update on how our markets are evolving, explain how Applied is enabling the AI road map with our differentiated technology and exciting pipeline of new products and outline how we're transforming the way we work with customers, partners and across the company to drive higher velocity, increase operating leverage and scale more efficiently.

Over the past several months, global AI adoption has continued to accelerate as improvements in the performance and cost of AI computing are translating into real-world applications that deliver compelling returns for users. If I look at our own company as an example, today, we have more than 35,000 AI users across our global workforce. We are deploying AI to drive new scientific breakthroughs, accelerate research and development programs, optimize factory and supply chain operations, increase innovation and productivity and services and automate workflows across our corporate functions. This enables us to redirect resources towards higher value work and grow the business significantly faster than our headcount. Similar dynamics are playing out across a broad range of industries and organizations. Publicly available data indicates that global token generation has increased more than threefold in just the past three months.

Importantly, AI demand is not only growing rapidly, it's also diversifying. Since the beginning of the year, there has been a meaningful increase in agentic applications, which layer on top of continued growth in generative AI training and inference workloads. AI computing architectures are workload-specific and optimized for different generative, agentic or physical AI models. Agentic AI models do more than respond to queries, they plan, reason and execute tasks autonomously. They therefore require a computing architecture that is more CPU-intensive, while also increasing demand for DRAM and NAND. As agentic AI applications grow, they provide an additional tailwind for wafer fab equipment.

Last quarter, we said the availability of clean room space was a key factor pacing the rate of industry investment. As customers find new ways to reallocate or create space, we are seeing incremental requests for equipment deliveries in 2026, and we now expect our semiconductor equipment business will grow more than 30% this calendar year. Given the unprecedented demand environment, we are working closely with our customers on longer-range planning. Our largest customers are providing rolling 8-quarter forecasts, so we can prepare the required manufacturing capacity and service resources for their ramps. With this improved visibility, we see continued growth across this extended planning horizon into 2027 and beyond. And we are investing to support our customers' expansion plans.

For AI computing, leading-edge foundry logic, DRAM and advanced packaging have the greatest impact on overall system performance, power efficiency and costs. As a result, we expect these three areas to account for more than 80% of the year-on-year growth in total wafer fab equipment spending in 2026 and see a similar profile in 2027. These are also the areas where Applied has strong leadership positions and an innovative pipeline of next-generation technologies. In leading-edge foundry logic, Applied is the clear #1 process equipment provider with highly differentiated solutions in materials deposition, modification and treatments, conductor etch and e-beam technologies. Gate-all-around nodes grow our available market considerably while also providing a catalyst for multiple points of market share gains. This quarter, we announced two new products that further strengthen our gate-all-around portfolio.

To meet the requirements of different AI workloads in the data center and at the edge, chip makers provide designers with a range of transistor options with some tuned for peak performance and others turned to use the lowest amount of power. This tuning is achieved through precise optimization of the materials in the metal gate stack. Our new Trillium ALD integrated material solution precisely deposits metals in the most complex gate-all-around transistor gate stacks. By integrating multiple metal deposition steps in a single platform, Trillium ALD provides angstrom-level thickness control of metal gate stack layers giving chip makers maximum flexibility to tune threshold voltages across different transistors.

In advanced foundry logic, shallow trench isolation or STI, is used to electrically separate neighboring transistors. These narrow isolation trenches are some of the smallest structures in a gate-all-around device. Our new precision PECVD system uses an industry-first selective bottom-up deposition process to place material exactly where it's needed and protect the STI structure from damage during subsequent processing steps. By preserving the original shape and height of the isolation trench, our new PECVD solution reduces parasitic capacitance and lowers leakage to boost device performance. In advanced packaging, Applied is also the overall leader with strong positions in high-bandwidth memory and 3D chiplet stacking. We expect to grow our packaging revenues more than 50% in calendar 2026 and are very well positioned at upcoming packaging inflections.

We recently announced our intent to acquire NEXX to further strengthen Applied's portfolio of panel-level technologies, which are designed to enable larger body packages for AI accelerators. In DRAM, AI computing is driving incredibly strong demand and customers are aggressively adding capacity at 6F squared nodes, while accelerating their development of next-generation device architectures. Applied is the #1 process equipment provider in memory today thanks to our very strong position in DRAM wiring, patterning and peripheral logic steps. We expect to gain additional DRAM market share at upcoming transistor and device architecture inflections. We will provide more details at our next master class in June, which will cover both our DRAM and advanced packaging technology road maps.

To accelerate the industry's road map further, we are changing the way we work with our customers and partners by creating a new model for collaboration and innovation. Applied's global EPIC platform is designed to significantly reduce the time it takes to commercialize breakthrough technologies all the way from early-stage research to full-scale manufacturing. For chip makers, EPIC provides earlier access to Applied's R&D portfolio and faster cycles of learning through the co-location of key innovators from customers, partners and Applied. In addition, EPIC co-innovation programs will provide us with greater multi-node visibility to guide R&D investments and resource allocation, increase R&D productivity and value sharing and accelerate design wins for applied equipment and services.

The centerpiece of the platform is the new EPIC Center in Silicon Valley which remains on track to begin operations in the fall. Earlier this week, we announced our EPIC co-development engagement with TSMC, who joined as a founding partner together with Micron, Samsung and SK Hynix. We're also excited to announce our first 3 EPIC university partnerships with ASU, RPI and Stanford as well as the development partner agreement with Advantest.

We are finalizing additional EPIC agreements that we will publicly announce in the coming months. To accelerate the transfer of new technologies from Applied's labs to customers' fabs, we are also driving new innovations in service. Service is another important growth driver for Applied as we increase the revenue we generate per tool on top of a growing installed base. As a result, we expect Applied Global Services to deliver a sustainable annual growth rate in the mid-teens and potentially higher this year.

Our advanced service solutions enable customers to accelerate production ramps and optimize output, yield and cost in their high-volume manufacturing environment. Today, we have more than 35,000 chambers connected to our proprietary AIx software capabilities that use AI-powered monitoring, diagnostics and analytics.

Before I hand it over to Brice, let me briefly summarize. AI adoption is accelerating and diversifying, fueling broad and durable demand for semiconductors and semiconductor equipment. Leading-edge foundry logic, DRAM and advanced packaging are the most critical drivers of performance, power efficiency and cost for AI computing. As a result, we expect these three areas to account for more than 80% of the year-on-year growth in total wafer fab equipment spending in 2026 and see a similar profile in 2027. These are areas where Applied has strong market leadership today and a high-value pipeline of next-generation products, providing us with an exceptionally strong foundation for sustained multiyear revenue and profit growth.

Finally, through EPIC, our advanced services portfolio and rapid AI adoption across our operations, we are transforming how we work with customers, partners and inside Applied Materials, driving higher velocity, improving value capture and efficiently scaling the company as the industry grows. Brice, over to you.

Thanks, Gary. AI is driving wafer fab equipment spending to the areas where Applied has been investing the most and we see the positive mix continuing in the second half of the calendar year and well beyond. As the market shifted to our areas of strength in Q2, we delivered double-digit sequential and year-over-year growth across revenue, operating profit and earnings per share.

I'd like to thank our teams and partners for making these results possible by meeting strong customer demand for our AI enabling materials engineering technologies and systems. On today's call, I'll provide an update on the demand environment, discuss several strategic priorities, summarize our Q2 results and provide our Q3 guidance. Since we spoke February, the demand outlook has strengthened across almost every leading indicator we track. Cloud service providers continue to increase capital investments. Most leading-edge logic and DRAM fabs are running at full capacity. Our customers have announced more fab projects and are giving up the clearest and longest visibility we've ever had. Customers have been using a variety of techniques to increase clean room capacity this year, which is growing the market and our revenue expectations. And based on our latest discussions with them, we expect 2027 will be another strong record year for the industry.

Next, I'll summarize several of our strategic priorities. Our top priority is increasing output to serve our customers' growing demand. We've nearly doubled our manufacturing capacity to support them with expansions in the U.S. and Europe and an additional new manufacturing center in Singapore. We've increased our build plan, inventory positions and logistics capacity. We are systematically translating our 8-quarter customer demand forecast into a consolidated signal to our suppliers. Ensuring they have the visibility they need to make their own capacity and resource additions.

Next, I'll share how this translates to profitability, funding our collaborative R&D process, helps us identify the highest value technology challenges and gives us line of sight to the most compelling solutions. As we bring newly developed tools to market, our portfolio becomes more valuable and our gross margins expand. In fact, our non-GAAP gross margin has increased 800 basis points since Gary became CEO in 2013. It is now crossing 50% at the company level and approaching 55% in Semiconductor Systems. In addition, we are focused on driving higher operating profit and leverage with productivity tools and plans being deployed across the company. While fully investing in the R&D that grows our business and gross margins, we also expect to increase spending more slowly than revenue and deliver increasing operating profit.

Next, I'll summarize our Q2 results. We generated record revenue of $7.91 billion, which is up 13% sequentially and 11% year-over-year. Non-GAAP gross margin reached 50% in the quarter, increasing 80 basis points year-over-year driven by value-based pricing from our most differentiated products, coupled with ongoing manufacturing cost innovations. Non-GAAP operating margin expanded to 32.1%, up 140 basis points year-over-year. And we delivered record non-GAAP earnings per share of $2.86, which was up 20% year-over-year.

Turning to the segments. Semiconductor Systems delivered record revenue of $5.97 billion, which was up 16% sequentially and up 10% year-over-year. The transition to gate all around nodes, along with capacity additions at leading-edge FinFET nodes drove record foundry revenue as well as record revenue across ALD, epitaxy and materials treatments. DRAM revenue of $1.7 billion grew 18% year-over-year. Advanced packaging revenue is accelerating this calendar year within both foundry logic and DRAM, and investments are shifting toward our leadership positions in 3D stacking. Segment gross margin and operating margin both increased year-over-year.

Applied Global Services delivered record revenue of $1.67 billion, which is up 17% year-over-year, reflecting the benefit of higher fab utilizations. Services growth remained strong as our installed base expands and customers choose our most advanced services to boost output and yield. AGS also generated year-over-year increases in gross margin and operating margin. Other revenue of $280 million was in line with our expectations. China represented 24% of our semiconductor systems plus AGS revenue. We expect our business in China and our ICAPS business worldwide to be flat to slightly higher in the calendar year. Cash from operations was $845 million. Capital expenditures were $635 million, resulting in free cash flow of $210 million. We distributed $765 million to shareholders, including $365 million in dividends and $400 million in stock repurchases. In March, we announced a 15% increase to the quarterly cash dividend and achieved a goal we set several years ago to double the dividend per share.

Now I'll share our guidance for Q3. We expect company revenue of $8.95 billion, plus or minus $500 million, which is up nearly 23% year-over-year. We expect non-GAAP EPS of $3.36 plus or minus $0.20, which is up nearly 36% year-over-year. Within this outlook, we expect Semiconductor Systems revenue of around $6.9 billion, AGS revenue of about $1.75 billion and other revenue of around $300 million. We expect non-GAAP gross margin to increase modestly to approximately 50.1%, and we expect non-GAAP operating expenses of around $1.485 billion. Finally, we're modeling a non-GAAP tax rate of around 11%.

In summary, the growth in AI that we've been investing for is now in full force. As a result, the industry spending mix has shifted to leading-edge foundry logic, DRAM and advanced packaging where Applied has built the #1 process equipment market positions. We are investing with confidence to support the strong long-term growth our customers are giving us visibility into and ensuring our suppliers do the same. Finally, we are using the benefits of the AI technologies we enable to accelerate innovation and revenue generation and increase operating leverage and shareholder returns.

Now Mike, please begin the Q&A session.

Thanks, Brice. To help us reach as many people as we can on today's call, please ask just one question and no more than one brief follow-up.Operator, let's please begin.

And our first question for today comes from the line of C.J. Muse from Cantor Fitzgerald.

You talked about 8-quarter rolling visibility with customers. And I'm curious how that might be causing order patterns to change, perhaps upfront payments, a change in the pricing environment. I would love to hear how you're thinking about your relationship with customers, given how tight equipment is and will likely be for years to come.

Hi, C.J., it's Brice. Thanks for the question. So yes, for the large customers, we're definitely working on 8-quarter rolling visibility with them. That helps us primarily plan the supply chain. Our supply chain needs that kind of lead time in order to make their investments and expansions across the large group of suppliers. We've said before, we have on the order of 2,000 direct suppliers and a large number of components for each tool. So that's the primary reason. From a payments perspective, as you know, some of our customers do -- we do require deposits, but that's not across the board. On the pricing side of things, our pricing generally works as long-term contracts with customers based on projects, so you can picture it as a 2- to 3-year pricing contract for a particular project.

So pricing moves relatively slowly in the environment. What has been driving our pricing up over the past couple of years and helping us grow our gross margin over the past couple of years has been the gradual enriching of the portfolio. So every time we launch a new solution, it's typically a more important solution in terms of its value to customers, solving complex problems. That makes the portfolio stronger, and we price accordingly for that. And that's why you've seen our systems gross margins improve over the last 2 years. So I'll leave it at that. No -- at this point in time, no change in the overall model.

Yes. C.J., this is Gary. I would say relative to pricing, really, we're in a great position in the industry in that the most critical innovations for AI computing are in the sweet spot for Applied in leading-edge foundry logic DRAM in advanced packaging and really applied innovations or enabling these architecture inflections that are providing tremendous improvements in computing. So that puts us in a good position with tailwinds to drive pricing in the near term. And then also, as we're creating more value for our customers, it creates an opportunity for us to capture more value from Applied Materials. So I have high confidence that the margin progress that we've seen over the last few years is going to continue as we go forward.

As a quick follow-up, just on the gross margin side, a great guide with, I'm assuming, depressed China. How should we think about gross margins beyond the July quarter, particularly, as it appears as silicon will continue to grow sequentially well into 2027 and beyond?

Hi, C.J., thank you. So we guided 50.1% for the company-level gross margin. I'll just remind investors that we're now reporting our gross margin for each operating segment. So they'll be able to see that our Semi Systems gross margin is 54.8% in Q2, and that represents the improvements we're talking about. And on the systems, to your point, we expect to continue to make improvements, that's really driven by the gradual strength in portfolio as we launch new equipment. So the improvement will be slow, but we expect continued improvement in the gross margins. And that's really where you get that guide of 50.1%. So a slight increase for Q3 from Q2, and we would expect to be able to continue that process going forward as we launch new tools and solutions.

And our next question comes from the line of Stacy Rasgon from Bernstein Research.

For a 30% year-over-year equipment growth, so that looks like you're suggesting something like $14.5 billion, $15 billion in the second half of the calendar year for equipments? And I guess, I just want to verify that's true. And I guess what are your thoughts -- it was too early about calendar '27, but I mean given '26 is still a constrained year. I guess what are your thoughts on WFE growth versus your own growth in '26? And is there any reason to think that '27 couldn't be even better as cleaners become more available? I guess just how do we think about the trajectory of growth into '27 as the clean rooms like come online relative to what you're suggesting as we see into the back half of this year?

Yes. Stacy, good to hear from you. So on the 30% year-over-year equipment growth, it does suggest a second half on the order that you described. We do think that the demand signal is very strong. Our customers increased orders in the last 90 days, as Gary described, as customers are finding new floor space and clean room solutions. And I think investors should think about when they think about the road map of capacity. We've said before, we're tracking over 100 factory projects globally. We added more than 10 just in the last quarter. So you should expect a pipeline of new clean room coming on board, so customers can continue to grow the wafer starts across the end markets that we're talking about. So we do expect growth in WFE. We do expect growth in wafer starts overall, and we think that's headlined by the AI demand function.

Yes. Again, as Brice indicated, '27 still looks like a strong growth year for us. And I can tell you that I'm having constant conversations with customers, and they're looking at '27, and they're looking at '28. Again, because the compute demand is growing so quickly. Earlier on the call, we talked about agentic AI on top of what we've been seeing and that we're modeling incremental CPU demand, incremental DRAM and NAND demand, that's a meaningful increase on top of what we had been forecasting previously. And then you go beyond that with physical AI coming in the future, we think this demand environment is going to continue strong for a number of years. And certainly, as I'm having many conversations with customers, that is a major focus for them.

Got it. That's helpful. For my follow-up, I wanted to ask about your manufacturing capacity. So you see you doubled it. So is it all ready to go? Like how much revenue -- I guess how full -- maybe the question I'm asking is like if it was full, how much revenue capacity could you actually support, and is there actually more margin upside as that capacity that you brought online actually starts to fill up?

Stacy, yes. So on the first part, from a floor space perspective, it's ready to go and available. We would have to fit that up and hire people as we ramp. So we have the capability of significantly expanding the output. Last quarter, I said we could double as we're growing, it eats into that a little bit, but that's a rough approximation. So we have significant capacity available. Our job is to work with the supply chain and have the supply chain work at the same speed we are.

And our next question comes from the line of Vivek Arya from Bank of America Securities.

If we look at WFE growth this year, it's very strong, but it is still the semiconductor industry growth, mainly because semis are being driven more by pricing rather than units. So Gary, I'm curious that as you look over the next 1 to 3 years, do you think that semi industry growth comes more from units, or it still continues to be reliant on pricing?

Yes. Thanks for the question, Vivek. Again, when I'm talking to our customers or our customers' customers, I think everyone sees tremendous increase in computing demand going forward. And I talked about all these layers of demand that are increasing as we go forward. So I think that, and as I mentioned also with customers, the focus -- I was just with a customer 2 days ago, they were worried about the supply all the way into 2030. So again, the computing demand, I think, is increasing. I'm not going to speculate on pricing.

What we do see, again, is broadening in terms of the customers that we're working with because everyone sees this increase in compute demand, and that is really great for Applied because all of the markets that are growing the fastest, the leading-edge foundry logic. We're seeing a broadening of demand, very strong demand for DRAM and high-bandwidth memory. The ecosystem working on new packaging architectures that drive major improvements in performance and power tokens per second per watt. So again, all of this is great for Applied. I'm not going to speculate on the units versus pricing. But what I would say is that the market environment for Applied has never been better and our positions in the market have never been better.

And for my follow-up, if your system sales are growing over 30%, and there's a lot of discussion that maybe growth accelerates next year. How should we think about growth in AGS given that level of growth? Is there some kind of correlation? Is there some kind of kind of lagging growth that we can start to see acceleration even in AGS at some point?

Hi, Vivek, it's Brice. Yes, thanks for that question. So we had previously communicated low double-digits growth expectation for AGS, our services business. And to your point, as the systems business is running higher, and we've raised expectations for the systems business, that means the AGS installed base will grow. So the service opportunity for AGS grows and as well as the spare parts and as factory utilizations have improved. So we are going to raise our expectations for AGS to mid-teens for sort of the normal environment. And we think this year will end up being a little bit higher than that because we have so many -- so much utilization improvement across the industry and so many new factories that, that gives extra bump. So I would say mid-teens from a medium-term modeling perspective and higher than that this year.

The other thing I would say on AGS, there's never been a time where output yield innovation is more valuable than today. And I mentioned earlier on the call that we have over 35,000 chambers connected to our AIx servers. So we're also driving service innovations with AI-enabled applications, predictive models to improve wafer fab output, yield and cost. So I think in addition to the growing equipment business that will help accelerate AGS growth. We're also driving higher value service innovations that will also support that growth.

And our next question comes from the line of Timothy Arcuri from UBS.

Brice, I wanted to go back to this up 30% -- at least 30% this year as well. So if I just do the math, I mean, it sort of implies that you barely grow off of the July levels, which doesn't seem possible given you're booked out for at least a year. So I would think you can probably grow at least the same number of dollars in Systems that you've been growing in the last 2 quarters. So that would put you like more above 40%. So I'm surprised you said above 30% and not above 40%. So are you just being conservative, or is there something like in the back half of the year where the sequentials can't grow as fast from an absolute Systems level. Can you just talk about that?

Sure. Just to reiterate, we're saying 30% growth year-over-year in our Systems business. And Tim, I think we're not giving explicit linearity for the out quarters, but we'd be comfortable if you just assumed it was linear from Q3 to Q4 to our fiscal Q1.

Okay. So it's going to grow about the same on a dollar basis? Brice is that -- sorry, just to clarify.

On a dollar basis, I would just draw a line and say it grows linearly from our Q3 guide through Q1.

Okay. Got it. And then, Gary, can I ask you about Huawei story, I mean, how do you think about -- I mean that letter in and of itself is not -- like it doesn't really hurt you at all. But how do you think about the risk of that broadening because there's a lot of examples of these fabs being co-mingled in these clusters, some of which you can ship to and some of which you can't. So is there a risk that this spreads and maybe it sort of then captures more in the net, where you can't ship to these fab complexes that have stuff that's allowed and stuff that's not allowed co-mingled in the same complex. Can you just talk about that?

Yes. Thanks, Tim. Let me just clarify. Relative to our semi equipment business, we'll grow 30% or more in the year. And it's really supply chain. That's one thing that is, I think, an issue for everybody. As Brice mentioned earlier, our operations can scale significantly beyond where we're at right now. But it takes time for the supply chain to respond. And certainly, we're working that as rapidly as we can. And I really do believe we've made tremendous improvements in our supply chain and our operations over the last several years.

So I feel really good about that. Relative to restrictions, I don't really want to comment on that. All of that has been factored into our guide for the quarter in our viewpoint on growth in the calendar year. And again, what I would say, if you look at the mix of business going forward, the AI compute innovations are really going to drive in '26, '27 and going forward, leading edge foundry logic, DRAM, high-bandwidth memory and advanced packaging. And those are the areas where Applied has tremendous strength, and we are absolutely positioned to gain share as these inflections happen in all of those different markets.

And our next question comes from the line of Harlan Sur from JPMorgan.

In addition to technology migration and greenfield capacity build-outs, your customers are looking at their existing capacity footprints. They're trying to figure out how they can squeeze more wafers out of their fabs, it's more good die per wafer. So focusing essentially on throughput and/or focusing on yield or both, right. Is the Applied team seeing this? And is this an incremental driver of growth, more tool sales to alleviate bottlenecks maybe upgrades to improve tool throughput or maybe advanced services and analytics adoption to improve productivity and yields. Is this driving some of the incremental growth?

Yes. Thanks for the question, Harlan. Yes, absolutely. And I mentioned this a little bit earlier. Output and yield innovation is really a key focus for all of our customers. Again, it takes time for them to create more floor space to ramp their factories. So there is a huge focus and engagement, and this is really helping us to drive our service growth rate at a higher pace than we've seen in the past or even that we were anticipating in the past. And that's where I would also come back to how we're implementing AI inside Applied Materials. We have all of these connected chambers. Most of them are connected remotely, so we can have instantaneous experts connected into all of those different chambers. And again, this is elevating, increasing our expectations for our service growth rate going forward.

And then maybe for Brice, in addition to the strong growth in AGS, gross margins improved 30 basis points sequentially 120 basis points year-over-year. Operating margins grew 100 basis points sequentially to 29%, right? I think that's like the highest level in like the past 2 or 3 years. On the gross margin improvements, how much of this is just more attach of some of the higher value-added services like your AIx software suite, remote tool monitoring solutions, which I assume are all gross margin accretive. And then on the strong operating margins, I did notice that your OpEx for that segment was down about 8% sequentially. Was that just cost efficiency activities, or does that delta come back this quarter?

Thanks for the question. So on the gross margins there, I think the mix to more transactional and more spare parts in the quarter have helped us. So that's one of the drivers. You're right, the new service products that we're providing also help from a margin perspective. So I think those are the major drivers. And I think on the expense side, we did some restructuring that helped us with expenses. So -- but I would expect that we're continuing to invest in that business. We're building a training center. We're adding to our customer engineers and essentially expanding for the ramp at this point. So no change in expectations from a spending perspective. I think the margins are at a healthy spot at this point.

And our next question comes from the line of Atif Milk from Citi.

Gary, with your acquisition of NEXX in panel level packaging, can you help us understand how does that fit with your JV with Besi, what is the adoption time line for large panel packaging?

Thanks for the question, Atif. So I would say that we are the leader in packaging. I mentioned earlier on the call, we're going to grow that business over 50% this year. And I would say that in the entire semiconductor industry, this is one of the most exciting areas driving compute architecture innovation. So how you connect computing components together in large body sizes is an enormous focus for everybody. So at Applied, we have been investing. You mentioned the hybrid bonding technology and the acquisition of NEXX, that's a leading supplier of large area packaging, electroplating. There are a number of different innovations that we're driving. And this fits into that overall strategy where we also have a full-flow packaging EPIC Center, that is the only one in the industry.

We're engaged with all of our existing customers and then also there are a number of people working on new large body sized architectures again, to really drive tremendous improvements in performance and power the tokens per second per watt. So this is all part of that overall strategy that we've been investing in the last few years. You see, again, over 50% growth this year in our packaging business. Next year, we anticipate also a strong growth.

And the timing for those architectures, I would say that there is a tremendous amount of focus to bring those architectures to market as fast as possible. I'd really rather not comment on specific timing. I would just say that Applied, we have deep connectivity across the entire ecosystem with all of those people that are driving those new architectures. We have the broadest packaging portfolio in the industry. And we are really at the foundation of the key innovations needed to enable those new architectures.

Great. As my follow-up, Brice, I understand you guys do not comment on a particular project. But you said there are 10 new projects in the pipeline, and there's a lot of investor interest in Terafab. Will that be a project that will be in the pipeline, or is that more like next year?

Well, just to correct the record, I said more than 10. And you're right, I can't name any -- I can't be specific about any of those, sorry.

And our next question comes from the line of Krish Sankar from TD Cowen.

Gary, the first one for you. Applied had an interesting slide at SPIE that showed DRAM 1 delta node to be more litho intensive compared to 1 gamma. And obviously, you have 4F squared coming after that, which is more depth and etch intensive. So I'm wondering, do you expect 1 delta to be a big node and if so, could that slow down the depth and etch intensity in DRAM on an interim basis?

Yes. Thanks, Krish, for the question. So let me -- from an overall standpoint, DRAM, we are the #1 process equipment provider. And there's innovation happening at 6F squared, 4F squared and certainly going forward to 3D DRAM. So if I look at Applied in terms of near-term innovation, periphery CMOS logic being upgraded for higher performance and lower power transistors is a strong driver for our DRAM business, including very strong growth in epi. Of course, in DRAM, HBM packaging is a huge focus for everyone, stacking more chips vertically. And then for Applied Materials deposition with wiring and patterning, and we have very strong positions, leadership in conductor etch and e-beam technologies in DRAM.

So what I would say is that there is a lot of innovation happening in 6F squared that really extends our process equipment leadership and is contributing to the growth that we're talking about on the call here today, and we're even better positioned for 4F squared and 3D DRAM. I think if you remember, over the last a little more than 10 years, we gained 10 points of overall share in WFE and DRAM. We've been really performing incredibly well over the last few years and then this year is another great year for our DRAM business.

So I think for Applied, we're in a great position. And relative to litho intensity, I believe that going forward, for sure, materials intensity will increase, especially with 3D DRAM, and we're in a great position with 6F squared innovation, 4F squared and 3D DRAM.

Gary, just a quick follow-up either for you or Brice. I understand your customers are giving visibility into 2028. I understand for your capacity and personal planning purposes, but also some new greenfield and NAND scheduled for 2028. Is it fair to assume '28 could be another growth year for WFE after impressive '26 and '27, is it too early to make that call?

We don't think it's too early, Krish. I think we think it's secular growth. AI is the headline workload that's driving the secular growth. So we think you'll see more and more capacity plans from customers. That's the expectation is right now, it is factory limited as we've said, but we expect customers to continue adding projects to grow the outlook.

And our next question comes from the line of Shane Brett from Morgan Stanley.

My first question is, so the Gartner data showed that your conductor etch market share picked up about 300 basis points in 2025 despite weaknesses in other areas of your portfolio. Apologies if this is a bit of a trailing, backward-looking question. But how should we think about where those share gains came from? How should we think about your path towards being a market leader in this space where are those sort of incremental share gains going forward going to come from for your conductor etch business?

Yes, Shane, thanks for the question. So etch, let me talk about going forward, and then I'll talk about the overall market environment. So this year, etch will be one of our fastest-growing businesses this calendar year. and Applied as #1 in conductor etch for leading edge foundry logic gate-all-around nodes and #1 in conductor etch for DRAM. And both of those areas I talked about earlier on the call are some of the fastest-growing certainly in '26 and going forward. So we've been building a stronger position in leading-edge foundry logic. We've always been very strong in DRAM. .

And in our products, Sym3 is the fastest ramping product in Applied's history. We recently talked in one of our master classes about our new Sym3 Z platform. We've seen strong adoption there with more than 250 chambers, multi-hundreds of millions of dollars of growth in etch. So I think we're really, really in a great position. As I said, one of the fastest-growing businesses this calendar year. The other thing is really the opportunity for us to co-optimize across our whole portfolio.

So when we're working with our customers on new architectures, whether it's gate all around or wiring or new DRAM architectures, really that opportunity to co-optimize helps us -- we have great technology, but also we have great integration capabilities that's helping us grow this business at a high rate.

Great. And for my follow-up, this may be a little bit critical, but your process control market share continues to decline. Contrary to conductor etch where you are seeing share gains. My question is just how do you see the strategic importance of your process control business within your broader franchise?

Well, I believe this is one of our best opportunities overall within Applied Materials. So last year, we grew this business at a high rate. This year, PDC is going to be one of our fastest-growing businesses. And I'm very, very positive on the growth in '26, and I'm even more positive about our growth going forward. We have clear leadership in eBeam with our Cold Field Emission technology that gives us the highest resolution and the fastest imaging. This year, our optical inspection business is also on track for strong growth. We have a great pipeline of new technologies that we're going to introduce over the next couple of years that will also drive significant growth in PDC.

So one of our fastest-growing businesses this year positioned for strong growth in '27 and as we go forward. And the other thing I would add is there's great synergy with our eBeam leadership with the rest of Applied Materials in accelerating learning rate. So our process equipment teams, they're using this leadership in eBeam imaging to optimize processes at a faster pace. So that is helping us to drive growth in our process equipment business on top of PDC being a great growth business in and of itself. So again, I don't share your view on the perspective on the business. I think this is a great business, one of our fastest growing this year, and I'm very optimistic we're going to keep this growth going, going forward.

And our next question comes from the line of Joe Quatrochi from Wells Fargo.

I was wondering if you could talk about your supplies position for greenfield versus upgrades. I would assume given that the portfolio depth and just the number of new greenfield fab projects expanding into next year. How do we think about just the accelerating growth opportunity for Applied relative to peers?

Joe, it's Brice. Yes, I think most of the projects we track are greenfield projects, especially on the logic side. We do very well on greenfield. That's probably the best intensity from Applied perspective. We also do well in upgrades. The one place that that's different is NAND. We don't participate as much in upgrades. But I think what you're seeing in the environment is just a continued search for more and more floor space and more equipment being put in place. You see that in DRAM, you see that in leading logic. And of course, that's been the case in ICAPS as new -- significant new capacity has been added over the last several years. So I think a lot of that investment is greenfield.

And then as a follow-up, increasing the AGS long-term growth expectation. Can you help us just kind of bridge the gap? I think the prior target had included the 200-millimeter business that's now moved into Systems. So I guess like how do we think about the impact of that to the increase in the growth expectation?

Yes. Joe, so that should be a clean look at this point. So we've moved the 200-millimeter equipment business and restated our financials or recast our financials. So that's all in our Systems business at this point. So when we look forward on AGS, we're only talking about the services business. And you may have heard, I just updated our outlook for that and said, mid-teens for the AGS business is sort of a good multiyear growth rate assumption. And then we expect to be higher this year because we have a increase in utilization across the ecosystem and an increase in the number of new fabs ramping relative. So there's a step up this year that helps that business be higher than the mid-teens.

And operator, we have time for two more questions today, please.

And our next question comes from the line of Jim Schneider from Goldman Sachs.

Your mix of business this quarter pivoted quite strongly again to foundry logic. I'm curious, as you look into the back half of this year or whether you see more of a return to spending in greater concentration to DRAM? And then on a preliminary basis as you looking into 2027, which do you expect to be the fastest growing technology area?

Thanks, Jim. Yes, in the second half, it goes back to the theme that we've been describing. You're going to see strong growth in leading-edge logic, in DRAM, in advanced packaging and actually NAND also. So you're seeing a pull really from the headliner AI across the entire end market grouping with the exception of ICAPS. So ICAPS goes back to -- there'll be some digestion with all the capacity that's been put in place the past couple of years. So -- and we didn't call a fast grower between DRAM and leading logic. I think both of those will be accelerating in the second half.

And then as you look at your customers' longer-term plans, can you share where they're seeing the greatest upside to the longer-term forecast across those same areas?

That's a good question. I think we haven't answered which one between DRAM and leading logic will be the most growth across the multiyear horizon. We think both of those will be very strong and actually advanced packaging goes right with it. On the NAND, we see -- we did raise our bit growth forecast for NAND. So probably a few percentage points and at least our view is, it will still be satisfied by upgrades. So we don't expect a lot of new wafer starts on the NAND side, but we do think the demand forecast for bits has gone up on NAND.

Yes. Jim, just also part of the question you asked earlier, we see a similar profile in '27 to what we're seeing in '26. And really, that's being driven by AI computing. The markets that are growing the fastest in '26. We think they continue to grow at that same rate as a percentage of the mix in '27 and going forward.

And our final question for today then comes from the line of Melissa Weathers from Deutsche Bank.

I just wanted to touch really quickly on the ICAPS side that, Brice, you kind of just talked about, but I think if we look at a lot of the analog reports, this earnings season, it does seem like inventories are starting to lean out and maybe utilization of those fabs are starting to get better. So I realize it's not the fastest-growing part of your business. But any updated outlook you guys have on maybe when we could see some more material spending on that core ICAPS business going forward?

Melissa, good question. And that's a great point. There are some strong areas in ICAPS. I think analog and photonics, power chips are all areas that we're seeing that are very strong. So that makes sense to us. I would just encourage investors to think ICAPS is still a very strong market. It's one of our largest markets. I think this is the first year in a few years where leading logic is actually ahead of ICAPS, but ICAPS is still plugging along, still adding capacity at a significant rate. It will just be -- it just won't grow a lot year-over-year until we digest the capacity.

The utilizations have improved in ICAPS. So to your point, I think 300-millimeter utilizations are in a very healthy range at this point. So when we look forward, we expect ICAPS from an equipment perspective, to eventually start growing at the same rate the devices are, which is mid- to high single digits. We just have to get past this period where utilizations catch up with the installed capacity.

Got it. If I can squeeze one last one in, in the end of the call. Just the EPIC Center, I know you guys are a couple of months away from unveiling that. So just any last couple statements you can make on what that could do to drive innovation. And I don't know if it would be share gains or competitive advantage, but anything on EPIC Center we should look forward to?

Yes. Melissa. I'm really excited about the EPIC Center. I mean, again, all of our customers and the entire ecosystem earlier is in a race for leadership or AI computing. That is really driving our businesses in leading-edge foundry logic, DRAM, high-bandwidth memory and advanced packaging. And really, when you think about architecture innovation, Applied's material innovations are really at the foundation of all of those architecture innovations across all of those fast-growing segments. So having our customers and partners co-located with these technologies that are enabling the architecture innovations here in our EPIC Center and co-located with our innovators is going to be an acceleration for Applied and for the entire industry.

We've announced 8 partners that we talked about earlier, TSMC, Samsung, Hynix, Micron, Advantest, ASU, RPI, Stanford, and we will be adding more soon. For Applied, it gives us better multi-node visibility because, again, we're working many generations out in the future with all of these different companies and really co-innovating. We are working with them to create these new architectures in the EPIC Center. And it also enables us to be designed in with our equipment and our advanced services for those new architectures. So I'm really excited about the EPIC Center. I think this is the right strategy at the right time, and it's going to be an accelerator for our customers and for Applied Materials.

Well, thank you, Melissa, for your questions. And now, Brice, would you like to give us your closing thoughts?

Excellent. Thanks, Mike. We're really pleased with the investments we've made, puts us in a great position as AI drives incremental demand across the industry. We're in a strong position to grow revenue, expand margins and increased operating leverage. We have a number of upcoming events to call to your attention next week. Tim Dean from our services business will be at the JPMorgan conference in Boston. The following week, Gary will be at the Bernstein conference in New York. And a week after that, I'll be at the BofA conference in San Francisco. We hope to see many of you at those events. Mike, please go ahead and close the call.

All right. Great. Thank you, Brice. And we'd like to thank everybody for joining us today. A replay of the call is going to be available on the IR page of our website by 5:00 Pacific Time, and we would now like to thank you for your continued interest in Applied Materials.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

I think we're set to go. Well, good morning. Welcome to day 1 of Cantor Fitzgerald's Tech and Industrial Conference. This is our second year. Very pleased to have Applied Materials and Brice Hill, CFO of the company. Welcome.

Thank you. Thanks for hosting us. New York, wonderful weather.

Yes, yes. We brought this lovely weather for you. Be assured, it will snow on Thursday.

But to start, I think the world has dramatically changed in the last 3 months, both from your outlook, your competitors' outlook. You called for revenue growth for silicon of greater than 20% growth here in 2026. This is, of course, limited by clean room space availability, resulting in seeing plenty of room for another double-digit year in '27. Do you agree with this line of thinking? And what do you see as the biggest risk to this view?

Well, certainly, the demand signal is extremely strong. I've been talking to people about artificial intelligence and AI. And we've expected our business to pick up based on the demand. When we look at cloud service provider investments -- top cloud service provider investments and data center AI, CapEx are in the $600 billion this year, projected to be in the $700 billion next year. And we've seen a lot of pull from our customers for more advanced logic, more DRAM and more advanced packaging solutions.

Right now, the market is constrained with the leading-edge semiconductor components, those 3 areas. And we expect that demand signal to continue very strong and that dynamic of being constrained not to change in the foreseeable future. That's the expectation.

C.J., you mentioned that it's constrained by fab space. We did, of course, increase our expectations for this year. So there was more space available to utilize this year. But to your point, it's -- we think it's fully utilized at this point with the space available. So the ramp will be metered by space in leading logic and DRAM as we go through the, let's say, next -- it might be more than a year that we experience that.

So with that as a backdrop, are you starting to see customers slot tool availability in '27 and even '28?

We definitely see slotting into '27 at this point, but I'll back up and say foreseeing this ramp that we're talking about, we've been working with customers on improving our visibility to 2 years with all of our top customers. And in fact, all the customers across our network, we're asking for 2 years of visibility into the equipment that they need. And then, we provide that signal to our suppliers.

I've highlighted before that we have over 2,000 suppliers that we work with on a day-to-day basis. You have to give those suppliers a signal if they're going to change their capacity, if they're going to hire people and train people. You have to give them enough lead time to do that because this is a significant increase in output. And so we've got 2 years visibility from our customers. We're providing that to our suppliers. And when it gets closer, when it gets within 1 year, that's part level detail, so the suppliers can truly ensure they can meet your needs.

And in terms of the 2-year slotting, are all customers willing to share that information or only the majority, let's say?

Well, I looked at it this morning, just so I would -- I know that. But I would say it's -- thinking generally about the world, first of all, it's all customers. It's an ask of all customers. I will say that the visibility into the longer list of China customers is more difficult for that period of time. In some cases, they haven't completed those plans. But I think if you think about the largest customers, leading logic, DRAM, NAND, largest customers, those are very complete views.

So if you think about operational readiness, and I know your goal based on that backdrop is to be ready for everything. But this is the first cycle that I've ever seen, and that is a 26-year view, where you're seeing leading-edge logic, DRAM and even NAND all in an upturn. And when you put it all together, you're potentially talking about during COVID, where WFE grew by $35 billion nominal dollars, where this time, it could be $60 billion, $70 billion, $80 billion, $90 billion over a 1-, 2- or 3-year period. And so can the industry support that kind of rapid growth?

We think the industry can support that growth, and that's why the supply chain is so important in this process. As you highlighted, during COVID, we experienced -- there were different pockets of the supply chain that were very difficult to improve. We've never stopped working on supply chain since COVID. We've had to reengineer it to be more regionally self-sufficient. We've had to reengineer it to make sure we have fewer sole reliances across the supply chain.

We've made our own supply chain more global than it was in the past. We've increased our capacity. We've increased our inventory positions, and we've improved the signaling to the suppliers. So I would say at this point, we don't see any roadblocks to the supply chain being able to support the lift that we're talking about.

And maybe a wildcard question that's arisen in the last, I guess, 9 days of war and how important oil production is to helium. I guess, are you hearing anything from the supply chain around challenges there?

I don't have any perspective into our customers. I know from an Applied perspective, we have reviewed that, and we don't think it will be a constraint for Applied at this point in time, but that will be a good question for the customers and how much they use of that particular gas.

Perfect. So maybe moving on to end markets. You obviously talked about a number of growth drivers here in 2026. So maybe to narrow in, for leading-edge foundry, we're seeing a broadening of spend. I guess, maybe if you could speak to that? And is that breadth something that can really help '26? Or is that more of a '27, '28 story?

Well, what you're seeing, I think the strength, the fastest driver are these AI systems. Data center now is about 30% of demand for wafers on the leading edge. So that has just eclipsed demand for PC components on leading edge. We expect it to overtake smartphone components by 2029. So that data center growth on the leading edge is really where the strength of the demand cycle is coming from.

I just looked at a GPU system for 2027 that's being planned. It's got double the GPUs of a previous system. It's got about 50% higher transistor count per GPU. It's got 33% more memory per GPU. So when you tear apart these AI data center systems, you can really see the concentration continuing to improve in all the various compute and memory components.

And when those systems are built in more and more high-complexity solutions, that's what pulls on the advanced packaging techniques. But that leading edge, that is the strongest pull for leading edge. You asked for breadth. I think those 3 markets are all growing, and the market is constrained at this point on leading edge. And so we see 100% utilization across all the leading-edge nodes.

And maybe on DRAM, I guess, can you speak to kind of the dynamics there? Obviously, we're in a supply-constrained environment, but would love to hear kind of how you're thinking about your leverage to HBM. And as we transition to HBM4 and beyond, how Applied Materials' share of wallet should grow?

Yes. I think DRAM similar. It's being pulled by that same demand function. About 15% of the DRAM wafer starts right now are allocated towards high-bandwidth memory. High-bandwidth memory is a double opportunity for the equipment industry because not only are you selling equipment to make the DRAM, the high-bandwidth memory is more intensive from a wafer perspective. It takes 3x as much wafer area to make the same amount of memory with the high bandwidth component. And then, you stack the high-bandwidth memory. So there's additional process steps in order to stack that memory.

We think about 19 extra steps, 15 of those are equipment steps, where Applied Materials provides solutions, and we sell more than 50% of the value of the equipment that goes into those additional packaging steps for high-bandwidth memory. So very strong demand signal. I think the roadmap will continue to build out. Customers are working to accelerate floor space so that they can add capacity. And as new technologies come on, we think there'll be also other stacking and bonding solutions that the industry will develop, and we'll participate in. Those will be inflections that will be valuable for Applied.

And maybe I'm getting ahead on the service question. But I'm hearing upgrades of tools, whether it's even a micron adding an extra layer of EUV to clear up clean room space, replacing KrF tools for higher throughput. Are you seeing that particularly from the DRAM market?

We have. We have heard that -- I think we've heard that both for logic and DRAM, where customers will look to optimize floor space in various ways, and so, not surprising. We're trying to maximize output at this point in time.

And so maybe to combine leading-edge foundry and DRAM and the advanced packaging side of the house, your business has grown from $500 million to $1.7 billion, 2020 to 2024. But last year, it declined while others saw growth. Can you talk to the divergence? And how we should think about the business from here?

Yes. 2024, we're talking about advanced packaging. 2024 was a very strong year. There was the initial build-out of the HBM equipment on the DRAM side. And that was a high number. I think it was about $700 million in 2024. It was a little less in 2025 after that initial build-out. So that slowed down.

As we're looking forward, we put it in the fast lane of growth, C.J., when we talked about semi equipment growing more than 20% this year. The way to think about it is advanced logic or leading logic and DRAM and advanced packaging are all in the fast lane. So they'll grow faster than that 20-plus percent growth rate.

ICAPS and NAND will be on the slower growing side. So you can see the faster groups will grow much faster than the 20% and the slower is much lower. We've said ICAPS, for example, will be approximately flat this year is the expectation.

So back to the advanced packaging, we think it will be fast growing this year. We think there'll be continued investment in HBM, and that will continue to grow. And we think advanced packaging overall will continue to grow with that same AI packaging-driven need.

So Life in the Fast Lane, Eagles then.

Life in the Fast Lane.

So how about on NAND? That's a market that you've talked about is not growing as fast. However, we're obviously in a very tight environment. You've got 1 player adding wafers, everyone else adding layer counts. I guess, why do you think it's not comparable to the other parts of the market?

Well, I think NAND is interesting. The bit demand, the bit rate demand has been very strong and continues to be strong. I think we've said it's in the past that it's in the high teens for a bit for bit growth. The issue with NAND is that the technologies have been so excellent in terms of providing more bit density, each advance in the technology that you just don't need more wafer starts to grow the bit supply by 20% each year. And that's been what's happening.

So if you look at the NAND wafer starts over the last 4 or 5 years, they're relatively flat. We count about 1.4 million wafer starts a month on the NAND side. And that's been roughly flat. So what you see is companies adding capacity for those additional layers, but they don't need to expand the number of wafers out.

We think that continues for the near future. At some point, they'll have to add capacity, but it's not in the near future. So that's what keeps it at a lower growth level from an equipment perspective. But again, there's plenty of NAND demand, the bit demand in the marketplace.

Makes sense. And maybe the last part, ICAPS in China, obviously, a place of concern from investors. And so how do you think about the trends there given your overexposure to both?

Well, it's -- I don't know if I would agree with characterizing it as overexposed to ICAPS. ICAPS is our mature node technologies for Applied Materials. The ICAPS stands for IoT, communications, auto, power and sensor chips. So it's those chips that are built on like 28, 40, 45, 60-nanometer type nodes. We have a very strong position in those nodes.

And if you look over the last few years, we typically have for our Equipment and Services business in the high 20% of the business that goes towards China, and most of that demand has been ICAPS. We had a very small period of time, C.J., where our -- the reported percent of China business for Applied was much higher. And that was when we were serving DRAM. We had a build-out of DRAM capacity in China. So it went into the 40%. But otherwise, I would think, as an investor, 25% to 30% is the reasonable range where we're serving business in China, and all of that is our ICAPS business. So a very important business to us.

We don't think we're overexposed. And we think that business continues. It will be flat over the near future because there's been a significant amount of investment in capacity in China, but it's a very good business for us. A lot of that future growth will be on 28-nanometer. We have an excellent position in the 28-nanometer node. And where we can -- the customers that we can serve, we'll serve -- we'll do a good job of serving. We're also continuing to innovate in that space.

Makes sense. So it sounds like flat is -- means we're derisked. Curious -- I think President Trump and President Xi will have a meeting at some point in the next month or so. And I think there's hope for some sort of grand bargain. And just curious, given the very tight nature of both DRAM and NAND, do you think there could be relaxation of restrictions for perhaps the consumer memory market? Have you heard any inklings of that from Washington, D.C.?

We've heard nothing from Washington, D.C., as far as I know. I have read in the press what you mentioned that some device companies may be trying those memories because of the constraints in the market. Certainly, that would be upside to our outlook if we were able to serve those customers again. The China market has been constrained. That's one of the reasons we grew more slowly. It's been constrained by the trade rules. Currently, U.S. companies are more constrained by trade rules than non-U.S. companies. That's something that we continue to work with the government on. And that would be an upside to our forecast if we could serve those customers.

Perfect. Now, maybe moving to service. You've guided for double-digit growth here in 2026. At the same time, we discussed earlier, upgrades and customers at near peak utilizations. I guess, how are you thinking about the drivers this year? And is there a potential as we layer in maybe more aggressive capacity adds? I don't want to say an uptick to that number, but maybe that number proving to be conservative.

Well, our reported quarter, just reported quarter, our Service business grew 15% year-over-year. Low double digits is our outlook, and it's -- when you think about that business, every single quarter, the installed base of equipment that we can serve from a services perspective grows. We expect the installed base to grow 5% to 10% depending on the market each year. And we're adding service products every single year to our portfolio, which allows us essentially to provide more value to customers.

And finally, the attach rate to our equipment in terms of applying services goes up each year. Customers are building in new cities, new areas. They tend to use the services more because they're looking for qualified labor to help them ramp the factories. So those 3 dynamics help grow that Services business in low double digits.

And certainly, if we have higher utilization or we have more growth on the equipment side, then that grows that installed base and gives us upside to that. But we think that low double digits is a high confidence forecast.

Perfect. And then maybe a part of the business that's not asked much about these days, and you actually just put it into the other category display. I think there's been hope that there would be an OLED-led inflection at some point. Where are we in that? And at what point and what magnitude could that start to help the story?

Yes. OLED, very important. We've got some innovations. We launched a technology called MAX OLED, where we have more of the share of wallet in terms of producing the OLED solutions going forward. And we do think that there will be an inflection with more penetration in the laptop form factor and even larger devices. Television would be the place where you get the most screen size.

Nothing to announce at this point, but we think penetration for OLED will continue to increase across the industry. And we're not reporting that as a reportable segment any longer, but we did say that we would share in investors when the business changes in size. And so we can look forward to that going forward.

And I forgot to mention something on the services side that I want to come back to. We recently did a reorganization. We used to have our 200-millimeter equipment business inside of our Services business. We reorganized and moved that 200-millimeter equipment business and put it in our Semiconductor Equipment business. So when investors now look at our Services business, it is pure recurring revenue. So it is the spares you need for existing tools, and then, the services that we sell along with those tools.

And that gives us -- when we talk about that low double-digit growth rate and the confidence in that growth rate over time, about 2/3 of that business is under contract. Those are, on average, 2.9-year contract businesses -- contracts. There's a high renewal rate, over 90%, for those contracts. So those are all the elements that give us confidence that, that business will continue to grow at that rate.

Perfect. Maybe moving to gross margins. I think the market has been happily surprised, record 49.3% in the most recent guide. But I think as folks take kind of step back and think about where margins are pushing downstream at your customers, particularly memory, wondering why can't the equipment guys get more. And so, I know it's a very different market. You have to add value in order to derive that increase in pricing and margins. But curious, as you sit here, you've talked about trying to raise pricing. How should investors think about that progression? And what are the key underlying drivers that support those higher margins?

Yes, I think that's a great question. First of all, the portfolio becomes more valuable every year. And by the way, investors can look. We report -- now, with the new guidelines on segment reporting, if you look at our segments, for our Equipment business and our Services business, we report our gross margins. You can see those separately. It was 54.5% in recent quarter in our Equipment business.

So the portfolio, as we do our R&D and make our investments in R&D, we think the portfolio becomes more and more valuable every single year. You're working on higher complexity problems for the customers, in some cases providing integrated solutions that basically deliver modular level solutions to the customers, these become more and more valuable. And you should expect the gross margin to improve over time with that higher value.

At the same time, over the last couple of years, we've invested in our pricing process, which means we've got a much more sort of disciplined process in the company to determine the value of the equipment that we're selling to set a target price for the sales team to have the sales team try to achieve that targeted price. That's a much more disciplined process than what we've had before. Our pricing has gone up over the last 2 years with that general improvement in the overall portfolio, and we expect that to continue, C.J.

Perfect. And how does EPIC fit within kind of the gross margin story? Obviously, you're partnering even closer with your customers. You announced this morning a partnership with Micron. I would assume that, that speaks to years down the road of higher margins. But curious today, what's the impact of that investment? And then, how should we think about the progression of margins related to that partnership?

I think investors and customers expect Applied to be working 3 and 4 generations out with our customers. In order to do that, you need lab space. And so what we've built in Sunnyvale, right near our Santa Clara campus, is a large lab to host all of our customers and to do this long-range work with our customers on future technologies. That is really the core of the industry. You have to be 5 to 10 years out in the materials identification and the interaction between those materials in the tools that apply and remove those materials. It takes that sort of long-range investment to work with customers to provide those solutions.

And when we're effective, you get designed in early on. And so you know you have those designs, and in many cases, since they are modular level, those designs can last for generations and generations in process technology. So we needed more space to do that. And C.J. referenced an announcement this morning, one of our impressive customers, Micron, long-standing partner, has announced that they're going to be joining the EPIC Lab, and they'll be part of the collaboration process in the EPIC Lab. So that's a very important announcement for the company. It joined Samsung as another founding partner in the investment.

So we expect to have a large number of our customers in EPIC. It's a very important investment for the company in terms of the future of R&D for the company, and we're looking forward to opening it this fall and fitting it out with the tools that will be the newest generation tools and working with our customers on those.

And so as a plug, SEMICON West, October, I believe you'll be hosting a couple of events around this.

Absolutely. We're hosting an event around the opening of the facility, and it will be exciting and impressive.

Perfect. Perfect. Maybe to close, I think we've got little less than 5 minutes to talk about operating leverage. In late 2025, you had headcount reduction. And you guided OpEx relatively flattish into Q1, which is better than kind of normal seasonality. How should we think about, particularly thinking about a fairly steep recovery, in my view? How should we think about operating leverage for the Applied model going forward?

We expect to deliver operating leverage mechanically by raising spending at a slower rate than revenue growth. That is the expectation. But when you say, well, why is spending going up, most of our growth comes from organic investment. So we are building lab space. We are building manufacturing space. We are adding headcount for this ramp. When we sell more tools, we install and service those tools, so we're hiring the headcount and training the headcount to be ready for the ramps at our customers.

And this quarter, we added a number of new R&D programs that will expand our portfolio in the future, where, of course, we have high confidence in the ROI of those programs. And so with the higher confidence outlook, the longer outlook that we gave to the Street from a revenue perspective, we felt we were in a position to fund those programs.

And from an investor perspective, I would -- if you look at Applied, the way I think about it, we tend to reinvest about nearly half of our profits, and the rest, we distribute to shareholders through buybacks and our dividends. And so you will see Applied continuing to make investments in our core portfolio and in adjacent portfolios. And those are high return on investment products from our perspective.

What's the average cycle time from R&D investment dollar in to ramp HBM revenue out?

I think it's several years. So -- of course, it depends on the application because some applications are modifications of something that's existing, so that can go a lot faster. But if you have something that's 3 or 4 nodes out, that could be a 5-plus-year roadmap.

Perfect. You alluded to capital allocation, half of free cash flow. In the last 12 months, you bought back $4 billion of shares. You do sit in a position where you are above net cash breakeven. I tend to model you around net cash breakeven and return everything. Has your view changed at all? Is there a certain level of cash that you need to run the business? Or is that still a fairly decent kind of philosophy behind modeling capital returns?

I think the way I would look at it from a capital return perspective is we expect to return 80% to 100% of our free cash flow to investors over time. And that's not every quarter, C.J. So in the recent quarters, we've had pretty significant capital investments with the EPIC Lab that we're talking about. We had some other cash needs. So that will fluctuate on a quarter-to-quarter basis. But as you referenced, over the last year, our distributions, I think, were about 86% of free cash flow. So no change there.

Perfect. Maybe to close and thinking a bit longer term, particularly around your EPIC Center investment, how will you monitor or measure success with that investment?

I think that's -- if you look at speed of innovation for the company, that's what we're thinking EPIC will provide us, having our customers in our lab with the brand-new latest development technologies using those, that will speed innovation. The lab itself is built to speed up your ability to install hookup tools, change chambers, do new experiments. The lab is built to accelerate that process. I won't go into the construction details since we have 2 seconds left. But it is designed to speed the process up. It is designed to host customers, and we think that will accelerate our innovation and pace of innovation.

Well, perfect. I think we have to close there. Thank you all for coming, and thank you for coming, Brice.

Thanks, everybody.

Great to see you.

All right. I think we'll get started. I am Shane Brett, U.S. semiconductor equipment analyst. With us today is Dr. Prabu Raja, President of the Applied Materials Semicon Products Group. Let's get started. Dr. Raja , can you start by giving the audience just an instruction and sense of what you do in your role at Applied Materials.

Thanks, Shannon. Yes, about me. Prabhu Raja. I joined Applied years back as an engineer, this is my first job, and I led some of the valuable businesses in Applied Materials like a PVD business and edged and integrated products. I spent lots and lots of time with the customers. Sometimes I think I spend more time in the flights than at home. And the recently I have been to multiple customers through Asia and also the governments right now, governments want to be talking about semiconductor. So the good news is I have a lot of valuable feedback from the customers on the demand, where they are, the challenges. And the bad news is I sleep about 3 hours these days. So if I mess up, just assume it's a jet lag, not me, yes. .

But the Air mode pretty good. Yes. right.

I guess just to get started then as President of the semi products group, just what are your key priorities, say, just where is your focus is with Applied?

So if you really look at those right now, it's all about demand. As I said, I talked to a lot of customers that demand is very high. They all want to know are they getting the tools on time. And I can tell you, pretty much I get e-mails every single day. I want to make sure that we're delivering on time. So we have incredible visibility from the customers. I'm focusing on making sure that we can scale and if we want to deliver the tools on time. That is right, right now. When you really look at the long term, so what do you think about when I'm the slide, what do you think about? I think about this semi-cap market, how big and how sustainable it is, number one. Number two, within semi cap, which part of it semicap is growing faster where we should focus on. Number three, the customers are having the tough challenges right now with all the inflections and how can we work together with the customers in solving those challenges.

These are the 3 high level is a wafer overall semi-cap market. As you can see that the demand is high, the fab utilization is pretty high. We are tracking around 100 fabs today. They're all in various stages, that part is really good. From what I hear from customers, they want -- need to be ready for the super cycle. That's what they call super cycle. I don't know what is the mean. Super cycle. That's why they say that, right? I want to make sure I'm not the bottom line, okay? Number two, if you really look at those, if you segment within those semi cap, not long ago, 1 year back, we say that a, it's a $1 trillion market by 2030. And 1/3 is leading-edge fondry logic, 130 Hiab, 130 memory. That's not changed. Now we are -- potentially, we can do $1 billion -- $1 trillion semi can do $1 trillion this year. Potentially, we can do that. And also, if you really look at the mix, what I see that is the fastest-growing markets are the ones which are enabling artificial intelligence right now, the data centers.

So we really look at those leading edge fondilogic, DRAM, advanced packaging. These 3 are growing faster. And the other ones are slow growth areas, we call it NAND and ICAPs, which are more in general computing. The good news is the fast-growing areas, 3 areas we talked about Applied is #1 in all those 3 areas. And we thought about the areas we invested in those areas. The last 1 is we talk about tough challenges. What are the customers concerned about. If you really look at those, a lot -- the multiple inflections are happening in this area. Each of this year, multiple inflections are happening in each of the areas. So what is customer doing? They are trying to integrate the devices to address their tough challenges. That means you put advanced logic and DRAM together through advanced packaging to solve their challenges. So what we are doing is, we are making it possible with our unique portfolio integrated solutions.

Got it. Got it. And I guess just on this operating environment, so you've talked about just semi cap model, your focuses and then the customer challenges. So we'll focus on the semi-cap model first. You threw out the word super cycle as it relates to sort of AI driving kind of this equipment market. How does that sort of AI drive this equipment market? How is it sort of beneficial to you guys focused on DRAM, logic and advanced packaging?

I think I talked about, I mean, 1 trillion -- 1/3, 1/3, 1/3. That's not there anymore right now. Right now, everything has changed right now. And a lot of right now really that what is a data center. That's all you've got to think of what is enabling a data center. When you really look at those advanced logic and -- sorry, leading edge, let me put the leading-edge logic, advanced packaging and DRAM. These are the fastest-growing markets as compared to that and as compared to the other market, and so the multiple inflections are happening in these areas right now. If you really look at the gate all around. It's extremely complex, and it's going through -- everything is going to 2D to 3D, right? Now you see that that a lot of complexity is there right now. And the complexity means that a lot of more steps, a lot of new steps are coming in more steps. And Applied is in a very good place to solve the complexities right now, okay? That's where I see that where the market is going.

And then I think the good part is we had a strategy, we call it inflection-focused innovations. And we kept talking about it for 4, 5 years, we talk about inflections are coming, coming, coming it's a time. Now we see that. Those wherever we strategize, wherever we invested, that is happening right now. So we are in a very good place in all those 3 areas. So that's why if you really segment it that's the area we are biggest focus right now is paying off.

Got it. So there's inflection focused innovations have sort of led you to DRAM leading logic and advanced packaging and sort of the stars have aligned with AI?

Yes. You are right.

Got it. Got it. I want to talk about 2026 because -- you sort of talked about more than 20% shipment growth for the calendar year. I think if the year plays out as you've sort of called it out to be, that will be the highest growth for Applied since 2021, which was back then the semiconductor industry, just equipment was a big bottleneck at that time with chipset just affecting a lot of other industries. Just how are -- how is the industry an applied prepared relative to 2021 to sort of meet this kind of massive surge of demand?

Okay. The short answer is we are in a much, much better place. I can tell you that. And it's a great opportunity. We are not going to let it go, okay? This is the number one. So you really look at those -- and like I said, I talk to customers a lot. They are giving us great visibility. They are forecasting the demand much, much earlier than ever before. The reason is they want to make sure they're getting the tools. I can see that demand is side, they want to make sure they're getting their tools. More important, when the tools are coming in, these tool needs to be installed. It has to be serviced and for that, you need a manpower much, much earlier, Applied does that.

So you can't just hire a college graduate and ask them to go and do that. These are complex areas you need to learn. So these guys need to be trained for 1 year or so. So for that reason, the customers are giving a visibility much, much earlier right now. That's a great visibility we get. And so that really helps us right now to plan and what do you do with that? -- You're right, COVID was stress test for us. We learned our lessons. And we fundamentally change how we do that in terms of how we plan, how we forecast and how we scale, how we execute, we fundamentally change that. We are in a much better place if you really look at those manufacturing. We can -- the capacity to double compared to what we had before COVID. And since we got a very good visibility from the customers, sometimes 2 years early, even beyond that, and what we do with the visibility is we are going and talking to our suppliers, partnering with the suppliers to early enough. We see where the bottlenecks potentially could be. We are well prepared for it. The suppliers are more ready right now. And the third part is that we talk about service and support. And we are expanding our service team. We are training them.

I think we are in a much better place. Like I said, we are not letting it go this time. For sure, we are more ready right now, yes.

Rallying 2,000 suppliers cannot be easy. So just how have you gone ready for this inflection? I know we kind of spoke about earlier, you guys kind of talk about a 5-year strategy. What were kind of the steps you put in place during the kind of 5 years leading up to this that allowed you to kind of meet this demand?

I think if you really look at those, Applied, if we look on Applied revenue, even after Applied revenue never went down. We didn't come down. We kept in the same every year, we kept increasing that increased the revenue in the last 20 years. That kind of helped us to customers to have more of a confident on us. Other ones we changed the model is right now. I really look at those with the customers, we truly work with our customers as partners rather than just a supplier customer related work with partners. I think we do the same thing for our suppliers. We work with them much more closely. So they're a lot more open, not only their capacity, they are also more open with their subsupplier capacities. So it's all about partnership, how closely work with them, how much visibility you give them this all together.

Got it. It's a tighter partnerships with your suppliers, but also with your customers, I mean you're talking about 2 years plus of visibility, just -- we're seeing 2 years plus visibility, but there's so many tech inflections right now, just this change in kind of rapid pace of complexity. How is that changing the way the equipment industry works with kind of your customers?

Yes. upon industry also talk about particularly Applied materials. Not long ago, I've been in industry for a long time. And they're scaling, if you really look at technologies, not that complex looking back and more predictable or litho-enabled scaling very predictable we had a handful of materials. And so customers had their own process design team. They're pretty much used to tell us, hey, what is my hardware spec, what is my process step. All I have to do is I got to meet the spec. Customers have their own -- the team, which can integrate everything together all steps together. Right now, the complexity has changed. It is really complex right now.

It's more of a customer supplier relationship with all the complexity we are talking about multiple inflections are happening, these inflections are incredibly complex, I can tell you that, like gate all around, you think about that. More than 2,000 steps. A lot of new materials are coming in. And more important, every angstrom matters. I can tell you the good example is in the transistor gate, the small 10-nanometer space. You've got to put 5 to 6 different materials. Everything is 1-nanometer thickness. So that's a 1 angstrom really matter, those kind of complexity. On the top of it, there is the step-to-step when it's out 2,000 steps, some of the steps that are interdependent Okay. So it's more like the Rubik cube that if you touch 1 step, 1 material, it impacts everything. It falls apart. So that complexity is increasing, right? That is more that part of it. On the top of it, the speed, speed is the game. And the customer want time to market becomes important. The customer -- they don't have a time to put together every pieces together.

So fundamentally, customers are working very closely with somebody applied materials. The reason is really look at Applied Materials. We understand the steps better than anyone because we have broad portfolios and with a broad portfolio, we understand the steps and how they're dependent on each other and also we can come with optimized solutes. -- better than anyone. And the customers are coming to us, they're working with us, partnering with us, 3 notes I had, in some cases, 3 to 4 notes I had. So when you have 3 to 4 loads I had and partnering with our customers working together to solve the problem rather than just meeting those hardware spec or process spec, now I become the part of solving the device challenges as a solution partner.

So that gives me incredible visibility on customer challenges, customer road map. I can use that to fund my R&D and more importantly, when you work that early, you are designed in into this. I'm telling you these complexities like a open heart surgery. Once you're designed in, you don't want to touch it, they fall apart. Okay. I think the biggest change is that the relationship what used to be like a supplier customers versus partners.

I think there's a really good segue because you spent kind of billions of dollars to invest in Epic. And kind of my question here is just how should we see kind of the ROI on that billions of dollars that was spent on Topic. You've had some nice customer announcements there. I'd love to hear about that. And just -- should we expect to hear about more customers when are you opening just kind of the road macaron when EPIC is going to come up and up running?

Yes. No, I talked about complexities, right? And also I talked about speed Okay. Right now, really look at those today, if you really look at those, how the innovation walks, innovation, the commercialization, let's call it, how it walks No, from university academic research, if you come with the new materials. Academic research to the equipments to semi manufacturers to the commercial chip takes 10 to 15 years. Go back and look at those finfet and Hikmetalgate, this all inventory somewhere around 10 years, 15 years, but that's the time it 10 to 15 years, it takes.

Right now, nobody has the time to wait for 10 to 15 years with the complexity. Speed is the game. Everyone wants to be the first. So what do they do? Rather than sequential way of innovating and commercialize, what Applied what we are doing is, can we do it in parallel. Can we co-innovate together. That means universities, equipment and customers can we work together in parallel in 1 place under 1 roof, Imagine you come with the new materials you can validate on the equipment, validate on the customer wafers. And your success rate goes up and the time of time to innovation to come has come down dramatically. That's the whole idea of success rate because I can tell you that otherwise success rate is too low because you can come with a new material, it doesn't work in the equipment. Right now we all work together, success rate goes up and also time to market goes down. I think that is the biggest benefit the customers see.

That's the reason that customers want to partner with us, not just customers but on universities and also the peers. They all want to be a part of it. Like you said, we announced with the Samsung. We are talking to and working with other customers, investees, major U.S. university days, also with the peers. And you'll see more announcements in coming months.

Okay. Well, let me word to that then. I guess let's talk about -- dive into the road map here. So leading-edge foundry logic. You sort of highlighted that from FinFET to GAA with backside power that sort of increases your revenue opportunity by about 30% for client fab capacity. Just where specifically, could you kind of give Cardon, where specifically applied is winning for those kind of inflections?

So let me see, when you say leading edge, fondlogic, the we are #1 that process equipment provider in the space right now. If you really look at those, there are 2 big pieces if you really look at those. The 1 big piece is that transistor, other big pieces of wiring. Let me start with the transistors, Okay.

Transistors are the ones I'm talking about the complexity. FinFET, we are #1, if you really look at non-lit, we're very close to 50%, maybe a little less than 50% share right now. That gear Talon makes it even more complex. Like I said, a number of steps are increasing significantly. A lot of new materials are coming in, and these materials are interdependent. They really interact with each other. So the complexity is happening where Applied has a leadership positions, like for example, EP is very critical. And PV is critical, metal yield is very critical. CVD is critical, implant treatment, you can see that where conductor etch -- those are the -- these inflections are happening, complexity is happening, their Applied material has a later sipes.

On the top of it, I talked about interdependencies between the steps. That means if you touch 1 step, it will impact the other step. So that means these all steps need to work together to get the solutions. That means Applied knows how to optimize better than anyone because we know all those pieces, and we know how to connect those pieces to make it work.

An integrated material solutions.

That's what we call it integrated material solutions right now, how we integrate -- in some cases, you can't take it out of the 2 machines. It's all under vacuum. And imagine I talked about 1 nanometer, the 10 atom. -- once imagine you are exposed to yes, it's not -- it's not the same material anymore, right? They all need to be integrated in 1 system. That's what Applied comes in and really helps. And the customer -- what they do is that these are the places we work together 3 to 4 NAND technologies ahead right now because this is not the 1 that you can just come and change it something. So we were 3 to 4 technologies I think it benefits both of us then for customers, they can do early validation on the wafer what we do and also time to market. For us, we get this visibility into the road map, visible into the technologies, road map, challenges, also our R&D funding. I don't have to put R&D in 10 different ways right now. I know I can validate I can fund it in an R&D funding guide of my R&D funding. And even more important, I'm designing. I know 3 notes earlier I'm designed in most cases. So win-win for both of us.

I want to talk about 2 more things within leading edge logic, wiring and just copper. I think the first question is just wiring module and leading-edge chips. How is it changing and where is the opportunity for Applied. And I guess the second part of that question is there's been concerns about PVD copper being at risk from ALD moly, Just what is your sort of answer to that concern?

Okay. Maybe particularly this topic is more personal to me because I joined the company in the PVD wiring. That is my first job, okay. And I've been hearing this. When I joined the company, people say that, hey, copper is going to end, PVDs going to end, don't join that group. That was 25, 30 years back. And yet copper continues to extend and PVD continue to extend. I think -- if you really look at the wiring, is a very valuable and large business for the company right now. And I really look at those in the -- today's GPU, there are 800 plus miles of wiring this is complex. Is look at those. And people -- the complexity in wiring is usually there as transistor. -- people don't give importance to the letting. Wiring is extremely complex. If you talk to the customers, any customer, they'll tell you, Litho is not my bottle like wiring is my bottleneck. That's the first thing they say that, wiring focus on wiring. That is the most important message. So what we see that is now 20-plus layers right now in the GPU right now. So we see that copper -- number of couples are increasing. -- layers are increasing. What is such change is what has changed is to put 1 layer. We used to have 3 different technologies integrated together 10 years back. Today, can imagine, the 7 different technologies are integrated into the 1 system, machine under vacuum to get 1 layer of wiring. Number of layers are increasing, number of technology steps inside each layer is increasing on the wiring. Wiring is big.

And I can tell you that with the breakthrough innovations, at least be our 3-plus nodes of copper rod extend. I can confidently say copper is going to extend for 3 more nodes or even more, okay? We have a path. And that brings to the molycon. There is always a misconception that moly is going to replace copper. Clearly, answer is no. Moly is not going to replace copper. Okay. Copper is going to stay here. Copper will continue to be here, continue to grow and more and more layers. Then moly comes in, really look at those wiring than you hear transistor. Something in between which connects them is contact. There are 3 layers of contacts today -- not -- yes, 3 layers softly contact. Tungsten is the materials -- contact material today Tungsten. That Molly has benefits over tungsten. That's where I see that people are talking about. They -- sometimes we call the contact autocase wiring. That also moly could be replacing tungsten. I think we recently announced a product, the spectral ALD mode. And with the foundry logic, -- we already have a PTR position right now because the ELD mall is replacing tungsten -- it's a very critical rarer it is. And really look at those moly is not as big as what you think really look at the market overall.

Copper is at least a magnitude or more than the mall itself Okay. And copper will stake continue to stay -- and Mali has its 1 place, it could inflect, but copper will be much, much bigger. Our copper will continue to grow. Quite honestly, copper is growing layers are faster than anything. -- the people that doubted you 25, 30 years ago, will be reminded in 5 years, that copper is still around. Copper will be still around. I can tell you that. I told you I worked with the customer 3 to 4 notes. I had, I know exactly what's going on. I do expect.

There you go. Next question I want to move on to DRAM because I think there's a perception that Applied is a bit more of a leading edge, like a foundry logic company, but you guys have gained a lot of share in DRAM over the last decade. Just can you kind of remind the audience where those DRAM share gains have come? Just how you sort of position yourself with this sort of inflection in DRAM spending?

Yes. So 1 thing always, I thought about underappreciated applied is that they think we are a pond-logic company. You're right, not a memory company, really look at DRAM I think over the last 10 years, we increased the market share in DRAM significantly. Where it came from is that patterning conventional patterning, UV patterning in both places, we increased the market share significantly, particularly UV patterning, we increased a lot more than conventional pattern. One thing. Number 2 is that the capacitor module -- that's a pretty complex structure.

We had a lot of key wins because a lot of new materials as a hard mark. We talk about the integrated approach. There is another term we use co-optimized approach. When we said integrated, 1 machine, multiple technologies are all inside the 1 we've seen, not exposed to yes, right? Co-optimize is the 1 that a, they don't have to build the same system, but they interact with each other so that we've got to optimize for each other steps. The step could be a neighboring step or even after 10 steps. Simple example is if you come with a new material, used to know how to deposit the material, if you know how to etch the materials, you should know how to remove the materials is to know how to analyze the material. If you give to the customer on new materials, if they talk to 4 different suppliers to take 7, 8 years, 10 years. They want you to come out with a complete solution for that, hey, give me everything so that I can just insert in my flow. That's where there'll be a lot of caves in capacitor. That is what happened.

The moving forward, let me break down to 2 conventional DRAM and HBMDRAM. Conventional DRAM is following logic road map, very simple. Transistor is going from planar transistor to high-k metal gate to FinFET. So where you get all the learnings? Nobody wants to reinvent the whole thing. Applied has a great share in arch of them, very easy plug and play there, right? Customer work with us. And DRAM also adopting copper layers, number of couple as are increasing in DRAM. So our market share position over many years in foundry logic is really helping us right now. When you go to it and on the top of it, you talk about even convene DRAM, you talk about 4 of score, you talk about 3D DRAM. These are less UV-seUVare more material sensitive. These are the ones, all materials engineering, everything going the third dimension. And this inflection will further help us because it's all a lot more materials, a lot more process technologies, a lot more integrated tools. That's for conventional data.

HPM is very simple, right? HBM, you need 3 to 4x more number of wafers per time -- that's it very simple. So that's where HBM is growing. On the top of it, the HBM packaging part alone is more process intensive. So that's where HBM is growing. It's a combination of inflecting what is happening, combination of number of copper layers growing and the combination of where the HBM is going right now. see. And I think we are really in a good place in all those DRAM influxes right now.

So just to summarize your take on DRAM kind of fam around just materials engineers and mterials engineering is expanding, which is sort of leading to the bigger opportunities for product?

That's correct. Yes.

Got it. I guess on the topic of HBM, at the very start, when you kind of talked about this AI inflection, we kind of called out DRAM, leading-edge logic and advanced packaging. And advanced packaging is is a small portion of your business, but is also a portion of your business where you're very dominant in HBM. Can you talk about just what are applied strength in advanced packaging? And where do you kind of see the opportunities to grow there?

Yes. Like I said, we are #1 in advanced packaging overall. HBr none really 26, what are the strong growth area. HBM packaging and 3D chiplet stacking. There are different names, different customer, different name people -- within advanced package within the even chiplet stacking. People called 3D stacking, whatever it is. So those areas are growing very strong. And Applied has a really good push on there. Really look at this advanced packaging, right? Packaging is nothing but wiring. On-chip firing whatever the learning what we have, we talk about copper wiring, what we had, all the wiring learning, what we had for so many years, all the machines we developed for so many years on wiring, Now all are being adopted off the chip right now. It's nothing but wiring right? So it's a good place to start with for us because all these products are already helping us or the learnings are there. That helps us.

On top of it, we already saw those inflection coming 10 to 12 years back. And personally, I was involved in this. I started this. In Singapore, we started a packaging lab. It's a complete flow lab in Singapore, we call it advanced packaging lab. Sometimes you call it Epic packaging. It does similar to what Epic what we have dream right now. What we do there is we have complete flow. We have customers coming in partnering with us, and to be our peers coming and partnering with us and some of the areas where we are not participating, we are working with them right now. And that gives us a great advantage if customer wants to validate a new skin, they come and work with us right there. That kind of help us.

So we saw that early, we started -- formed a packaging team and this integration flow really helps us right now. The 2 big inflection what is happening right now is bonding for sure. The other 1 is panel, really look at those. The bonding areas, we can see we have partnership with BSE and the panel area, we thought about it even 10 years back 7, 8 years back, there's a Tango system panel, we occurred the company right now. On the top of it, we are developing multiple products in tunnel right now. Since we have a display business for us, it's much easier. Now they have bigger tools to do the planet right now. On metrology, other area of focus on.

I guess my last question would be the sort of I look at this industry and think with market conditions being so tight, you have a once-in-a-generation opportunity to raise prices and improve gross margin.

I know this is coming yes.

What's your view on that?

Now if you really look at those in terms of margin, I think -- ever since Gary joined the company, we increased 7 percentage points margin right now. I think we are on the right track right now. I think we think a little different. I had many questions from you guys, hey, 1 time, can you increase the pricing and all? We think a little differently in this space right now. Right now, I talk about -- we believe in creating the value for the customer and sharing the value for the customer. That's what we believe in. Really look at those, I talk about complexity. I talk about working with our customers much earlier 3-plus notes I had. This all customer, what they care about is device performance, yield, reliability, time to market.

I think what we do is we partner with them, work together with them to address those challenges right now, 3 notes ahead. this is creating a lot of value to the customers. They've got a more chip, they've got a better chips. They are open to share the value right now. We see that already. We see that open to it. You see that complexity is happening where we have high share areas and partnering with the customer much earlier, and we have a control on the value what we can -- what customers can share with us. I think that's the way we think about setting the value. So what do you do with the value, something for a margin and also R&D investment. We want to increase R&D investment, sometimes we want to return to the shareholders in some areas. That is on overall value setting, but let's not forget that. We have a big, big focus on cost.

We talk about costs through technology, cost through innovation, how we can cut down the overall cost. We are working on both fronts. I'm very confident, not only we increase the margin over the years, I think it will continue to incrementally will increase this margin over the years.

Great. Well, on that positive note, that brings us to time. Thank you, Dr. Raja, and.

Thank you.

Welcome to the Applied Materials First Quarter of Fiscal 2026 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Mike Sullivan, Corporate Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining today's call. With me are Gary Dickerson, our President and CEO; and Brice Hill, our Chief Financial Officer. Before we begin, I'd like to remind you that today's call includes forward-looking statements, which are subject to risks and uncertainties that could cause our actual results to differ. Information concerning these risks and uncertainties is discussed in our most recent Form 10-K and other filings with the SEC. Today's call also includes non-GAAP financial measures. Reconciliations to GAAP measures can be found in today's earnings press release and in our quarterly earnings materials, which are available on our website at ir.appliedmaterials.com.

Before we begin, I have several calendar announcements. On Tuesday morning, February 24, Applied will host new product briefings at the SPIE lithography and Patterning Conference in San Jose, and you're welcome to join us in person. We are also very pleased to announce the first event in our 2026 master class series. We plan to cover transistors and wiring on Wednesday, April 8, at 9:00 in the morning Pacific Time and will host a live webcast.

Finally, we're excited to announce 2 special events during [indiscernible]. On Monday afternoon, October 12, we plan to host an investor open house event at the new Epic Center in Silicon Valley, California. We hope you'll join us there. And on Tuesday morning, October 13, we plan to host an investor breakfast in San Francisco. We hope to see you in person or on the webcast. And with that introduction, I'd now like to turn the call over to Gary Dickerson.

Thank you, Mike. In our first fiscal quarter of 2026, Applied Materials delivered revenue and earnings above the midpoint of our guided range. Our strong performance and outlook for 2026 and beyond are fueled by the acceleration of investments in AI computing. AI is at a tipping point where improvements in performance and cost translate to real-world applications that deliver meaningful productivity gains and return on investment for users. The race to build out AI infrastructure is driving unprecedented spending on semiconductors, semiconductor manufacturing capacity and research and development.

Today, the most critical and fastest-growing markets are leading-edge logic, high bandwidth memory DRAM and advanced packaging. These are areas where Applied has strong leadership positions as well as an innovative pipeline of solutions to enable next-generation technologies. In my prepared remarks, I will provide my perspective on how our markets are evolving, explain the role we are playing to enable the AI road map and describe how we're turning the opportunities ahead of us into sustainable, profitable growth for Applied. Semiconductors are the heart of the AI technology stack. With the accelerated growth of AI end markets, we believe that global semiconductor industry revenues can potentially reach $1 trillion in 2026, several years earlier than prior predictions.

For Applied, we expect to grow our semiconductor equipment business more than 20% this calendar year. We see the demand profile weighted towards the second half of the calendar year with availability of customer clean room space being a key factor pacing the rate of investment. Our largest customers are giving us increased longer-term visibility to ensure we have operational capacity and service support in place for their ramps. Based on this visibility, we expect strong growth momentum to be carried into 2027.

Improvements in AI data center performance and cost directly impact AI adoption rates by increasing the number of tokens generated per second and lowering the total cost of ownership, which is dominated by energy consumption, more AI applications become economically viable. This need for higher performance and more energy-efficient AI computing is reshaping semiconductor industry investments and driving high growth rates for Applied in leading-edge logic, HBM DRAM and advanced packaging. In leading-edge logic, our customers are adding capacity at FinFET nodes while simultaneously ramping gate all around nodes. Applied is the clear #1 process equipment provider in leading-edge logic with strong leadership positions across materials deposition, modification and treatment as well as in conductor etch and e-beam technologies.

Gate-all-around nodes grow our available market considerably while also providing a catalyst for multiple points of market share gain. In DRAM, customers are aggressively adding capacity at 6F-squared nodes, while in parallel, developing next-generation DRAM device architectures. AI computing is driving significant demand for high-bandwidth memory DRAM, which has larger die sizes and requires 3 to 4x more wafer starts per dollar bit than standard DRAM.

In addition, the number of dies in the HBM stacks is increasing from 12 today to 16 and then 20 or more in the future. This further grows demand for wafer starts and advanced packaging. Applied is the #1 process equipment provider in memory today, thanks to our very strong position in DRAM, where we are the clear leader in materials deposition for both wiring and patterning as well as conductor etch and e-beam technologies.

In advanced packaging, the mix of customer investments is changing. We expect the fastest-growing market segments in 2026 to be HBM and 3D chiplet stacking. Applied has very strong market share in both of these areas, thanks to our leadership and materials deposition and removal technologies, which is enabling us to extend our overall leadership in advanced packaging. In NAND, we are forecasting modest growth in equipment demand in 2026 and and we expect NAND to remain less than 10% of wafer fab equipment spending.

In ICAP, customers who serve the IoT, communications, automotive, power and sensor markets, we expect wafer fab equipment to be approximately flat year-on-year, both globally and in China. At Applied Materials, our strategy is inflection-focused innovation. By focusing our R&D resources on the development of high-value solutions to enable major device architecture inflections, we are accelerating our customers' road maps and driving sustainable value capture and margin expansion for Applied.

Our innovators have generated an expansive pipeline of next-generation products. products we have released over the past several years are significantly contributing to our growth in 2026. One example of this is our unique cold field emission e-beam technology where we expect revenues to double this calendar year to more than $1 billion and support process diagnostics and control, being one of our fastest-growing businesses in 2026.

In addition, our leadership in CFE e-beam imaging accelerates learning rates for next-generation chip architectures and adoption of Applied's process equipment portfolio. In 2026, we are planning to launch more than a dozen new products, including 3 for advanced logic and DRAM, which we announced earlier this week. Our [indiscernible] radical treatment system delivers item-level precision engineering of nanosheet surfaces, which enables higher speed next-generation gate-all-around transistors. [indiscernible], which is the newest variant of our [indiscernible] etch platform enables angstrom level precision for critical edge steps in gate-all-around transistors and advanced DRAM.

This extends our conductor etch market leadership in advanced logic and DRAM. And our spectral ALD system enables selective deposition of monocrystal [indiscernible]a new material that can reduce contact resistance and advanced logic devices by up to 15%. We Applied is leading the transition from ALD Tungsten to ALD Moly and logic contact formation. As transistor counts and wiring layers increase, copper PVD steps will continue to grow significantly, remaining an order of magnitude larger than ALD moly.

This week, we also announced our first EPIC co-development agreement, Samsung Electronics. Applied's global Epic platform is designed to support high velocity co-innovation with our customers and R&D partners. For chip makers, EPIC will provide significantly earlier access to Applied's R&D portfolio, enabling faster cycles of learning and accelerated transfer of next-generation technologies into high-volume manufacturing.

For Applied, EPIC will give us better multi-node visibility to guide our R&D investments while improving R&D productivity value sharing and our ability to be designed in with our products and advanced service technologies. As our customers ramp complex new devices in high-volume manufacturing, we see accelerating demand for our advanced services, supporting a double-digit growth rate for our service business. We have many valuable service innovations that accelerate the transition of new technologies from lab to fab and then accelerate ramps to enable increased yield and output in high-volume production.

Several years ago, we launched Applied's proprietary AIX or actionable insight Accelerator software capabilities. Today, we have more than 30,000 chambers connected to AIX servers using AI-powered monitoring, diagnostics and analytics. Across these connected tools, we are seeing 30% faster response times, enabling increased wafer output for customers and better service engineer productivity for Applied. In addition, we now have automated all our major distribution centers with state-of-the-art AI-enabled robotic systems, significantly improving our parts delivery speed and accuracy as well as inventory optimization.

Before I hand over to Brice, let me briefly summarize. Semiconductors are the heart of the AI technology stack and as AI adoption accelerates, we see industry revenues potentially reaching $1 trillion in 2026. Our inflection-focused innovation strategy is generating an expansive pipeline of higher-value products that are extending Applied's leadership in leading-edge logic, memory and advanced packaging and enabling us to grow our semiconductor business more than 20% in 2026. And we are driving deeper co-innovation engagements with our customers to enable energy-efficient AI architecture inflections and accelerate the transfer of new technologies into high-volume manufacturing. Epic will come online later this year bringing together key innovators from our customers and applied to significantly increase value creation velocity. Brice, over to you.

Thank you, Gary, and thanks, everyone, for joining us today. I'm pleased that Applied delivered strong first quarter results, and I'd like to thank our global teams and partners for their contributions. Looking ahead to Q2, we anticipate strong growth in our semiconductor systems business along with healthy gross margin and increasing profitability for the company. As Gary described, our business is strengthening with positive demand indications throughout the ecosystem. We are tracking higher levels of planned CapEx from cloud service providers. Semiconductor factory utilization is rising across all device types. Leading-edge foundry logic and DRAM capacity is essentially full and prices have increased. These dynamics are driving significantly longer visibility from our own customers who are increasing the number of new factory projects and fab expansion scheduled to be completed over the next several years.

As the largest supplier of process equipment and leading-edge foundry logic DRAM and advanced packaging, A major priority for us is ensuring we have the capacity to support our customers over this period. Over the past several years, we've nearly doubled our system manufacturing capacity and strengthened our supply chain operations. In recent quarters, we've given our direct suppliers longer visibility into our requirements, which has allowed them to proliferate the demand signal throughout the supply chain to secure the materials and labor needed to support growth.

At Applied, we've proactively increased our inventory by nearly $500 million year-over-year to meet the increasing build plans. As a result, we are well positioned to meet the increasing demand we are seeing from our customers. Next, I'll briefly summarize our Q1 results. Revenue of $7 billion was in the upper end of our guidance range and down 2% year-over-year. Revenue in China declined 7% year-over-year and represented 27% of combined semi equipment and AGS sales and 30% of overall sales. Non-GAAP gross margin was 70 basis points above the midpoint of our expectation and grew 20 basis points year-over-year to 49.1%.

Non-GAAP OpEx was in line with our expectation and grew 2% year-over-year to $1.34 billion, with an 8% increase in R&D investments largely offset by G&A spending reductions. Non-GAAP operating profit declined 4% year-over-year to $2.1 billion. Non-GAAP earnings per share of $2.38 was at the top of the guidance range and flat year-over-year. Included in our GAAP results is an accrual of $252.5 million related to an export controls compliance matter we disclosed in our 2022 10-K and later filings. The Department of Justice and SEC have closed their inquiries into this matter with no enforcement actions. We issued a press release and filed an 8-K related to the seat we reached with the U.S. Department of Commerce Bureau of [indiscernible], to resolve its inquiry and you can find all of our comments related to the matter in these documents.

Next, I'll summarize our segment results. As a reminder, beginning in Q1, our 200-millimeter systems business has moved from the Applied Global Services segment to the Semiconductor Systems segment. Corporate support costs previously reflected in Corporate and Other are now being fully allocated to our businesses. and display business results are now included in other. To help with your models, today's earnings press release and slide presentation include tables that provide a recast for these changes. Semiconductor Systems revenue exceeded our expectation in Q1 and included record DRAM revenue. On a year-over-year basis, revenue declined 8% to $5.14 billion.

Non-GAAP gross margin increased 100 basis points to more than 54% driven by our continued focus on value-based pricing, along with manufacturing cost improvements. Non-GAAP operating margin declined 80 basis points to 32.9%. Applied Global Services delivered record revenue of $1.56 billion, which exceeded our expectations and grew 15% year-over-year. Non-GAAP gross margin increased 210 basis points, and non-GAAP operating margin grew 320 basis points.

Turning to the balance sheet. We generated $1.69 billion in cash from operations. Free cash flow of $1 billion included elevated capital investments as we made continued progress building the Epic R&D center in Silicon Valley and further expanded our systems manufacturing capacity. Finally, we distributed $702 million to shareholders in cash dividends and stock buybacks. Over the past year, we've distributed over 85% of free cash flow to shareholders.

Now I'll share our guidance for Q2. We expect company revenue of $7.65 billion, plus or minus $500 million, which should be up around 9% sequentially. We expect non-GAAP EPS of $2.64 and plus or minus $0.20. Within this outlook, we expect Semiconductor Systems revenue of around $5.8 billion, AGS revenue of about $1.6 billion and other revenue of around $250 million. We expect non-GAAP gross margin to increase to approximately 49.3%. We expect non-GAAP operating expenses of around $1.415 billion. Given increased visibility and confidence in the industry's growth outlook, we are accelerating R&D co-development projects with our customers and partners. We remain highly focused on growth, productivity and margins. Finally, we are now modeling a non-GAAP tax rate of around 11%.

In summary, the investments we've made over the past several years have put us in a terrific position for profitable growth. The global expansion of AI infrastructure is translating to accelerating demand for our most enabling products in leading-edge foundry logic DRAM and advanced packaging. Along with advanced services that help our customers accelerate ramps and yields. Working closely with our customers, we're increasing the energy-efficient performance of logic chips, compute memory and systems and we are sharing in the value we create.

Applied is the materials engineering leader in the fastest-growing segments of the semiconductor market, and we are driving our operations teams and supply chain partners to increase capacity and output as our customers ramp in 2026 and 2027. Thank you for listening. And now, Mike, let's begin the Q&A.

Thanks, Brice. To help us reach as many people as we can on today's call, please ask just 1 question and no more than 1 brief follow-up question. Peter, let's please begin.

[Operator Instructions] Our first question comes from the line of CJ Muse from Cantor Fitzgerald.

Gary, we've heard a wide range of WFE guys for 2026 from your peers ranging from low teens to as high as 22%. I know you don't like to guide to WFE, but how does your view stand for 2026 versus these comments? In particular, the 20% that you talked about vis-a-vis what you think WFE will be? And if you can kind of talk to where you think the drivers of share growth will be?

All right. Thanks for the question, C.J. And yes, we don't -- we haven't talked about WFE for a very long time. And as you mentioned, what we said earlier on the call, as we expect to grow our semi equipment business more than 20% this calendar year being second half weighted. And we also see limited clean room capacity pacing the rate of growth which means 27 is shaping up to be another strong year. What's driving the business is really AI. AI is fueling the growth for the most profitable companies in the world and energy-efficient computing is enabled by leading-edge foundry logic, DRAM, including HBM and advanced packaging. And we expect these will be the fastest-growing WFE segment in '26, '27 and for the next several years. In all of these high-growth markets, Applied has strong #1 process equipment positions, and we're positioned to extend our leadership and gain share. And then giving color into these markets in leading-edge foundry logic, we're #1 and on track to gain share and capture more than 50% of our served market in gate-all-around and wiring, including backside power and we're #1 in deposition, conductor etch and packaging. In DRAM, we're #1 in standard DRAM HBM DRAM and HBM packaging and I think many of you know that HPM wafers are growing as our customers need to start 3 to 4x more wafers to deliver the same number of bets. We are the leader in materials deposition for wiring and patterning with rapid growth in conductor etch and ebeam. We expect strong growth in '26, and we're positioned to gain share going forward in [indiscernible]. We're also #1 in advanced packaging overall and #1 in HBM. Packaging will be a high-growth business for us in '26 and for the next several years. The highest growth segments in '26 or HBM and 3D chiplet stacking where Applied has high share, thanks to our leadership in materials deposition and removal technologies. And then today, NAND and ICAP spending are less driven by AI, high-performance computing, and we see NAND up this year but growing slower and remaining less than 10% of total WFE and the ICAP market being flattish this year, both overall and in China, following elevated spending in recent years. So Bringing all of this together, CJ, as you said in your question, we expect to grow our semi equipment business more than 20% this calendar year and our #1 position in these [indiscernible] growing markets creates a great setup for Applied in '27 and for the next several years.

That's very helpful. And I guess, Brice, how are you thinking about your gross margins into the cycle particularly when we consider rising volumes, your value-based pricing as well as significantly better margins downstream at your customers?

Thanks, CJ. I'll take the question on the margins. What I'd like to say is that we made progress in gross margins, up 700 basis points since I became CEO, and we're now at the highest level in 25 years, and I strongly believe we're driving the right actions to sustainably increase the value we create for customers and for applied to share in the value we are creating. Our strategy, as I've talked about many times, is inflection-focused innovation, targeting the fastest-growing value pools that enable data center AI computing and especially foundry logic, DRAM, including HBM and packaging. These are the fastest-growing WFE segments where Applied has clear leadership and we're positioned to drive strong revenue growth and margin growth. We have a great pipeline of even higher value products, and we're taking high-velocity co-innovation with our customers to the next level with our EPIC platform. For Applied EPIC gives us better multi-node visibility to guide our R&D investments while improving our R&D productivity, value sharing and our ability to be designed in with our products and advanced service technologies. In EPIC, top customer R&D innovators will be located with our innovators and our customers will have earlier access to key innovations that will enable them in the race to be first to market with high-value chip and packaging technologies. And we're innovating not just in process equipment, but also with our e-beam and [indiscernible] AI-enabled software platform to accelerate cycles of learning to bring innovations to market much faster in short, as we enable our customers to deliver more valuable wafers,

[Audio Gap]

Congrats on the strong results. Gary or Brice, my first question is also on WFE. You kind of mentioned that both China and global ICAP will be flat this year. Kind of curious, how has the view evolved over the last 3 months? Since 3 months ago, the consensus you that China would be down in 2026, but now it looks like it's going to be flat. So I'm kind of curious what changed. And then I had a quick follow-up.

Chris, thanks for the question. Last quarter, we said we expected 26 to be a strong year, led by AI-driven markets, which includes leading-edge foundry, logic and DRAM, including HBM and that's still our view. We thought China and ICAP WFE would be down a little this calendar year, particularly due to the ongoing capacity digestion. We now see ICAPs, as I just mentioned, flattish overall, both globally and in China, and we continue to believe that in the longer term, that the ICAP's semiconductor market will grow in mid- to high single digits, which is significantly lower than what we see for markets being driven by AI data center growth, which include leading-edge foundry logic, DRAM and advanced packaging.

Got it. Got it. And then just to follow up on advanced packaging. Gary, you mentioned HBM packaging and 3D chip it stacking is strong. Is there a way to quantify or look at advanced packaging this year versus last year? How it looks? And also the 20% growth you mentioned a greater than 20% growth for applied semis. How does advanced packaging stack within that framework?

Yes, Krish, this year, advanced packaging WFE spending is increasing, as I said earlier, in HBM and 3D chiplet stacking. And these are markets where Applied is #1 with very high share, and this is driving advanced packaging to be one of our highest growth businesses this year and extending our overall leadership. And I'd tell you, looking forward to the future for AI energy-efficient computing, our customers want new packaging substrates as large as possible to connect more GPUs memory and high-speed I/O at the highest density so they can deliver higher performance and lower power. There are innovations in new substrates and new architectures that will ramp in the next few years. And with our strong innovation pipeline in these inflections, I expect Applied's packaging business to continue to lead the industry and grow at a high compound annual growth rate for many years into the future.

Our next question comes from the line of Stacy Rasgon from Bernstein Research.

First, I wanted to touch on the more than 20% equipment growth. So you just guided $5.8 billion in equipment, I guess, for calendar Q1. So if I did my math right, I guess for the last 3 quarters of the calendar year, that 20 -- just even debt on 20% would give me something like $6.5 billion run rate for calendar Q2 through calendar Q4. And it sounds like it's even getting stronger through the year. So the exit rate sounds like it ought to be like larger than that. I guess what I'm asking is, is that math correct? And how are you thinking about the trajectory of achieving that 20% growth as we get through the year? Like how should we be thinking about an exit rate given that sort of implied average?

Stacy, it's Brice. You have the right pieces. We're signaling 20% -- greater than 20% for the calendar year. We're also signaling that the second half will be higher and so you've got our Q2 guide. We're not filling in the blanks in the middle because, frankly, we're still working on what that schedule will look like. But we know we have that level of demand to signal the 20%. So I think you're in the ballpark with your thinking, but we don't have the exact track.

Got it. That makes sense. But I guess, it also sounds like you think that momentum continues as we get into '27. So I guess is the limit on that growth right now is simply just clean room space? I guess if the clean rooms were there would that run rate be even higher? And does that suggest that as we get into '27, I mean, the beginning of '27, sounds like it ought to be even lower than like the end of '27 if that plays out as planned. Is that how you guys are thinking about it?

Yes. It's certainly metered by clean room this year in leading edge and DRAM. And so that is putting a cap on what can be done this year. just to the benefit of the whole ecosystem, we've obviously raised our outlook for this year. That's what you're hearing in this call. So there was space to add more capacity this year in DRAM leading logic than we had planned a quarter ago. So that's good news. But I think the customers have exhausted most of that space. Now for investors, all of our customers, I looked at the schedule. There's a number of factories coming online in '27. So we expect capacity to continue to be added every quarter. that will open up new opportunities for next year and we'll go into next year with still in a constrained position.

Stacy, the other thing I would add is I've had many discussions with our largest customer CEOs and R&D leaders. And I think this demand for AI data center is a significant wave that's going to last over a longer period of time. So when I talk to them and when they're communicating also externally, they're talking about extremely high compound annual growth rates. We talked about data center passing PCs and eventually smartphones in terms of total wafer starts. So I think it's too early to say exactly what the shape of '27 is going to look like. But as I said earlier, based on the customer conversations, I would expect 27% is also going to be a very strong year.

Our next question comes from the line of Mark Lipacis from Evercore ISI.

Gary, I want to ask a bigger picture question. based on your observation that the $1 trillion bogey for the semi industry is hitting a lot earlier than most people expected. I believe you used to suggest that the WFE intensity would be around 15% of this industry, and that was at $1 trillion that would support a $150 billion industry. But with the revenue accelerating and data center AI revenues kind of being the driver here, is 15%. Is that still the right way to think about WFE intensity in your view?

Yes. Thanks for the question, Mark. So WFE intensity has grown to around 15%. But really, for me, when I'm thinking about Applied Materials and what I'm driving is to focus on winning every segment, but to really make sure we outperform in the largest and fastest-growing markets. The semiconductor industry growth we envisioned is arriving sooner because of the AI data center growth. And as I said earlier, the fastest equipment markets growing are leading-edge foundry logic, DRAM and including high-bandwidth memory and advanced packaging because they enable energy-efficient AI data center performance. This is where Applied has been investing for many years to create strong leadership positions, and that's where we're seeing the fastest in market growth this year and I see that going many years into the future. And then back to the WFE intensity, our longer-term composition model is different than what we had talked about before. Before we talked about a 1/3 leading-edge foundry logic, 1/3 ICAP, 1/3 memory. And when those growth rates in those segments were roughly the same. This single capital intensity number was helpful in forecasting future growth, but now we're seeing a significant divergence in the end market growth rates. And I think it's time for a new growth framework. And then for Applied, again, we're in a great position in those fastest-growing markets. And if you look at leading-edge foundry logic and DRAM, those segments are going to be significantly larger than ICAPs and other memory segments is a part of the total mix.

Got you. And a follow-up, if I may. Based on that, does that necessarily put you in a position to, as you said, capture more value and from our standpoint, capturing more value is the code word for higher gross margin. So does the expansion of those markets get you to that point in time.

Yes. I mean, again, our focus is really and we've been focused on this for many years. I think I go back to 2019 when we first talked about this coming AI wave. And we've made tremendous investments inside Applied. We formed our Integrated Materials Solutions group in anticipation of this shift in WFE spending. And our focus is to create very high-value solutions for our customers. AI is a race for everyone to bring these new architectures to market. And as I said, in those segments that are enabling the AI data center, we're in a very strong position to bring very high-value solutions to our customers, and we'll be sharing in that value as we go forward. And certainly, again, we've driven margin growth over the last many years. I have very high confidence that we'll be able to sustain that margin growth going forward.

And our next question comes from the line of Timothy Arcuri from UBS.

So the -- I had a first question on AGS. So the OpExs are that it's not really growing much, but I have to believe that on a pro forma basis, that actually is growing because you're taking the 200-millimeter equipment business and you're putting that now into [indiscernible] so can you give us a sense of how big that is?

Tim, this is Brice. What you'll see in our numbers, we provided the recast numbers in our press release for that reorganization that moves 200-millimeter from our services business to our equipment business. You'll be able to see Crystal clearly in our numbers that Q1 has 15% year-over-year growth for AGS and our Q2 guide should be approximately over 12%, almost 13% year-over-year for AGS. So what we're signaling for AGS along the lines of your question is that it should grow at low double digits or better going forward. And that's based on having a 55,000 tool installed base. We'll grow that installed base every year at 5-plus percent. I think you heard Gary talking about we're launching new products in AGS, including our AIX, the Actionable Insights Accelerators products. And so high confidence in that business, it's all recurring revenue right now. 2/3 of it is under contract. The average contract 2.9 years, 90% renewal rate. And then you probably heard me talk about when we think about our dividend, we look at the cash profitability of our services business and it can afford our dividend payment at this point, and we like to make that connection since it's highly recurring revenue.

And then you said something, Brice, I think you said you've doubled the systems manufacturing capacity over the past -- I think you said a few years or maybe it was several years. So if I look back, like you were doing $5 billion a quarter in back in like '23. I'm just kind of -- I'm not sure if that's the base you're using. But -- so is the message that you could do like $10 billion in system sales, is that the -- when you say that you've doubled the -- your SSG could -- like is that the right number that you've gone from kind of 5% to 10% now?

I think the thought is fair. We're not going to put a number on it, but we have significant upside from a manufacturing perspective. We had preposition space available. We've built out a portion of that prepositioned space now. to help with the ramp that we're seeing, and we have more prepositioned space available. So we -- yes, we can comfortably scale much higher. And of course, the real job for us, we have approximately 2,000 suppliers. We've got to work with our suppliers. We're working to give them a strong signal. Gary talked about working with the customers to get 2 years' visibility, and we're working with them to get specific bill of materials so that the suppliers know exactly what we need with as much lead time as possible. So that's where the big lift is. And yes, we have we have plenty of upside in our output capabilities.

Yes. Tim, the only thing I would add is that in the discussions with customers, it's not so much the clean room capacity, as Brice said, it's supply chain, train service engineers, all of those things. So that's where the visibility for us has improved dramatically because customers understand that the supply chain takes some time, train service engineers take some time, and that's where we're getting significantly longer-term visibility with specific configurations better than we've ever had.

And our next question comes from the line of Vivek Arya from Bank of America Securities.

I'm curious what is driving the second half acceleration because the conventional thinking is that a lot of this clean room for memory is constrained until the second half of next year. So it's not memory [indiscernible] it's more space and foundry or logic. I'm just curious what is specifically driving the second half acceleration in 2026.

I think Vivek, it's Brice. I think it is a clean room. We had an inkling of this last quarter we had expected the second half to be higher based on availability of space for DRAM and leading edge. And the good news is customers have been able to increase their expectations for this year. But I think that is metering both both DRAM and leading edge. We saw a number of new factory projects announced during this quarter. So our tracking of the number of factory projects globally keeps ticking up each quarter, as you would expect, with a growing number of wafer start outputs -- and I looked at the next year's schedule, there's a number of factories in DRAM and leading logic that are scheduled to come online next year. So there's -- customers are working to accelerate that as quickly as possible.

Got it. And for my follow-up, what proportion of WFE do you think right now is being driven by data center and AI? And what was it last year, just so that we get a sense for what is kind of the growth portion of WFE versus what is exposed to the nongrowth areas.

Yes. It's a good question. I think in the recent past, we've said more than 20% of leading-edge wafer starts have been directed towards data center. And that has shifted, obviously, since that's growing much faster. So this year, it's passing PCs from a consumption perspective of leading-edge wafer starts. We've moved up our forecast. We think data center will surpass smartphones in 2029. And the way I think of it, this may not be perfect, but the way I think of it is the sort of traditional data center, the racks and file servers and those sorts of things are growing between 10% and 20% and the AI-related components are growing between 30% and 40% at this point, which gives you something north of 20% at this point from a growth rate perspective.

And our next question comes from the line of Harlan Sur from JPMorgan Chase.

Congrats on the strong execution. I've got a follow-up on AGS. On the solid growth outlook for this year in the systems business, combined with the strong and increasing utilization of your customers, as you guys mentioned you're attaching more value-added services and we've got this huge installed base. So it just kind of all bodes well for the systems business. If I look at the trend over the past 6 calendar years, AGS has grown like at about 11% CAGR, right in the middle of your target of kind of low teens growth. But given the dynamics I just outlined, right, do you see AGS growing faster than that 10% to 12% sort of historical CAGR this calendar year? I mean you're already entering this year trending higher than that, right? You're at like 13%, 15% year-over-year growth. Any reason for us not to believe that this type of growth sustains through the calendar year?

It's a good question, Harlan. As you point out, our Q1 year-over-year grew 15%, and you've got all the right dynamics I think those are additive. The installed base grows, the number of new products grows and the value of those products grow. So that's what allows that business to grow faster typically than our semi business. So we also have some headwinds as we've lost some of that business when you quote the historical rate there, with the trade restrictions that we had, we had accounts that we lost, which kept the growth rate a little bit smaller than the types of rates we're seeing this quarter. So I think when we look at our forecast, we feel that we're confident with low double digits. And then there will obviously be a range around that. We can have quarters with high utilization that does better than the low double digits.

Yes. Harlan, the other thing I would add is I'm very excited about our service innovation pipeline. I mean the 30,000 chambers that are connected to AIX servers gives us an ability to deliver more valuable services to our customers, increase our service engineer productivity. And again, the pipeline for us there is very strong. And our customers are ramping these new very complex factories gate all around in the future backside power, and you've got these complex memory architectures that they're ramping. We're seeing more integrated platforms, more integrated steps. As you said, I mean, I feel very good about our growth in AGS going forward. And I think there's a really good opportunity for it to grow faster going forward.

Got it. I appreciate that. And Gary, your process diagnostics and control business is a smaller part of the portfolio and revenue mix, right? But nevertheless, it's so important to your customers. And as we articulated, supply team has a very strong position in EV metrology, defect review, even wafer inspection, [indiscernible] absolutely critical for advanced process nodes of your 3 end market drivers, DRAM advanced foundry logic, advanced packaging, like where are you seeing the strongest pool for your PDC solutions. And you articulated a very strong demand profile for this year. Is your PBC franchise approaching or exceeding that sort of $2 billion kind of annualized run rate this year potentially.

Yes. Thanks for the question. I'm not going to give a specific number, but it is one of the fastest-growing businesses for us this calendar year. And we have leadership in e-beam technology, e-beam imaging. And one thing I believe is you can't fix what you can't see. With that technology, we have the highest resolution, 10x faster imaging. And you mentioned this is very important for our process equipment business and for our customers to drive faster learning rates so that they can bring those innovations to market at higher velocity. So Heartland, we'll be announcing new technologies and new products that are really, really important for material characterization for our customers. So the growth rate this year is going to be one of the fastest across all of Applied Materials. And I have very, very high confidence this growth is going to continue at a high rate in '27 and going forward.

Our next question comes from the line of Jim Schneider from Goldman Sachs.

I was wondering if you could maybe just give us a sense in calendar '26 and '27 could you rank order the relative growth rates you expect for both foundry logic and DRAM? And do you expect 1 to be sustainably higher the other in the next several quarters?

Jim, it's Brice. We can't really do that. And the reason is -- when we look at the request from customers, it's metered by factory availability. So I think it's difficult to see what's happening in the market from a demand perspective. So the way we're communicating it in the way we're thinking about it, greater than 20% growth for the semi business. We highlighted that there's a couple of businesses that are growing more slowly, which is NAND and then ICAP's which will be flattish. And then we have a group of faster-growing businesses, which is the leading-edge DRAM and advanced packaging. And I think our perspective is the pull on those from AI is very similar across all of those. So those are in the fast lane. Those are a higher growth rate. you can tell by the math that you would do that there's a portion of our business that's slower or no growth, and there's those 3 portions that are much faster so you can sort of get a sense of what the growth rates will be. But it's very hard to differentiate between them because customers have fabs coming on at different times. So we just don't think about it that way. .

And then [indiscernible] I think you previously indicated that you would expect gross margins to potentially step up in the back half of calendar '20 as you get more revenue absorption on that. Are you still expecting that to be the case even without any help from China? And what will it take to kind of get gross margins at or above the 15% rate without help from China?

Yes. I think mechanically, we expect some modest improvements in gross margin, and there's a tailwind and there's a headwind. The tailwind is with greater than 20% growth in our semi business. Typically, that grows slower than our AGS business. AGS has a slower margin. So with the faster growth in semi, that's a tailwind for us. The flip side is we've highlighted that we expect a flattish China. So as the mix to smaller customers receive as we go through the course of the year, that's a headwind on gross margin. So we do think we have the opportunity to continue to improve gross margins. We think the progress will be, I'll say, very slow through the course of the year.

And our next question comes from the line of Melissa Weathers from Deutsche Bank.

I'm looking forward to those master classes coming back. I think that will be very interesting. I guess I wanted to ask, in the next couple of quarters before we get a lot of the greenfield adds in memory. It does seem like a lot of the focus is going to be on node conversions and trying to squeeze out more bits out of the existing wafer capacity. RECONNECT So can you remind us how to think about your opportunity in a node upgrade scenario versus greenfield? Because that's -- and is this mostly an AGS story? Or is there something else that we should appreciate.

Listen, I think if you're thinking about DRAM, I'm thinking most of the DRAM investments that are being made are greenfield. So we should see that level of investment. And then on the NAND side, there is a number of upgrades. We think of the NAND business as mostly conversion and upgrades, as you're suggesting, and we participate less in that from a share perspective. So it's a smaller business for us.

Yes. And the other thing I would add is I mentioned this earlier, with HBM DRAM, you're starting 3x more wafers. And as you go from HBM3 to HBM4, that goes from 3x to 4x. So again, that's a very powerful driver in terms of the overall DRAM business. And people are also wanting to stack more chips going from 12 to 16 to 20. So that's another powerful driver for the DRAM business.

Got it. And then, Brice, really quick. You flagged, I think, $500 million of inventory that you guys are building up ahead of these ramps. So is there any update to how we should be thinking about days inventory that you guys are comfortable holding on the books or any working capital changes?

The days right now are approximately 153. I don't think that will go up very much. But yes, over the last year, we built $500 million and $500 million of additional inventory. And what I'm signaling there is we have been prepping for a larger amount of output, and we feel like we're well prepared to deliver the revenue that we're forecasting. So -- but Melissa, I'm not anticipating that, that will get out of hand because, of course, the revenue is going up each quarter. So I think the days will stay fairly tight to that zone.

Operator, we have time for 2 quick questions, please.

Our next question comes from the line of Blayne Curtis from Jefferies.

Just a quick one on the model price. I'm just kind of curious [indiscernible] obviously, you're seeing a bare growth path. So I would expect you to ramp up ex. Were you able to get all that in this quarter? And how do you think about it for the year?

Yes. lane. You see for the Q1, investors will see that we were very controlled on our OpEx, not much growth year-over-year. For Q2, we do have approximately 6% and growth sequentially in Q2. And we are funding growth projects that we have throughout the portfolio. And some of those will be early projects that are related to the Epic lab that's coming aboard as we get to the end of this year. So as you know, most of our growth is caused by organic investments. So we will be growing our investment level, especially as EPIC comes on board. But our expectation is we'll grow the spending more slowly than revenue growth.

And then I want to ask you on gross margin. I appreciate the detail between systems and AGS. I'm just kind of curious, I think you said 54% for systems, I mean, had kind of popped up to that level. So as we think about playing around with that blend as systems grows faster, I just want to understand -- I think you said it, but 54% is the right level. I mean it was actually 54.5%. SP137639875 And I guess, would you see modest improvement? Is it on that 54% or just overall?

I think just overall, you'll see modest improvement as we continue to move forward. And I mentioned the headwind. The headwind is the customer mix as we go through the year. But the way we think about it is the portfolio continues to get more valuable. Every day we complete an R&D project. We're tuning that portfolio to the most valuable inflection. So we do think there's opportunity long term to continue to improve gross margin.

And our final question then for today comes from the line of Atif Malik from Citi.

And thank you for providing the full year semiconductor equipment growth outlook. I have 2 quick ones. First on DRAM. You talked about your customers are developing for at Square. Can you talk about your confidence in maintaining your market share at that inflection? And when will the decisions come out? And the second one on NAND, Bryce, you mentioned the NAND modest growth less than 10% of WFE. Are you expecting any capacity additions in NAND this year?

Yes, I'll start off on the DRAM market share. We've grown DRAM market share significantly over the last decade. It's our strongest business. We're going to grow share in 6F-squared, and we're also in a very strong position and I have very high confidence that we're going to continue to grow share in 4Q.

Okay. And Atif, I think if you're thinking about wafer output, NAND hasn't increased wafer output in several years. So we're expecting. We are shipping product, [indiscernible] of it to be upgrades on the NAND side. And the reason is the technology is so good at providing greater and greater bit density every node that is just able to meet demand with the number of starts that are in place.

And before we close, Brice, would you like to give us a little summary.

Thank you, Mike. I'm excited that our business is accelerating and that the R&D investments we've made give us a broad portfolio of highly enabling products for the fastest-growing areas of the market. [indiscernible] will be at the Morgan Stanley Conference in San Francisco on March 2. And I look forward to seeing many of you at the Cantor conference in New York on March 10. Now Mike, let's close the call, please.

All right. Well, thank you, Brice. And a replay of today's call is going to be available on the Investor Relations page of our website by 5:00 Pacific Time today. And we would like to thank you for your continued interest in Applied Materials.

Thank you, ladies and gentlemen, for your participation in today's. This does conclude the program. You may now disconnect. Good day.

Okay. We're going to get started. I'm Tim Arcuri. I'm the semi and semi equipment analyst here at UBS. I'm very pleased to have Applied Materials with us. We have Brice Hill, who is the CFO. Thank you, Brice.

Tim, what a great venue. Thanks for hosting us, and great to be here and appreciate everybody's interest in Applied Materials.

So Brice, let's just start and talk about just WFE in general. You're pointing to the first half of next year being sort of flat to modestly up in the second half, I think you think will be a little stronger, so a little more of a back half loaded year next year. What are the drivers for the second half of the year to kind of accelerate versus the first half? Is it mostly due to DRAM and the fab readiness issue?

Awesome. Well, you probably won't be surprised if I bring up AI as a significant tailwind for the industry. And for Applied Materials, people who know Applied Materials, we love materials engineering. And I think there is not a surprise that the world is just hungry for more and more energy-efficient compute. And that's what we work on as a company.

And I think there's been a concept for a long time of pervasive compute. If you can make compute less and less expensive, higher performance, lower power, then you're going to find all kinds of new opportunities and solutions. AI is a great example of this. Tim, you mentioned DRAM, probably the largest grower we see in the near future is leading logic. Leading logic is -- leading-edge logic is 100% utilized on some nodes right now. There's a big pull from the accelerators, the GPUs, the CPUs that run these AI data center components. And then, of course, DRAM goes with that. So you've got a pull on leading-edge logic and then you've also got a strong pull on DRAM. And so those are the 2 components.

When we look in the second half, we've been working with our customers for the last quarter on getting more and more visibility into the road map for the next couple of years. And the reason is we started hearing discussions about more capacity being put in place, and you have to prepare your supply chain if you're going to do that. It's one thing for Applied Materials to have capacity, but we have over 2,000 direct suppliers, all of those suppliers on the same page. And so we started making sure we have good visibility from our customers on what their plans are over the next couple of years. And yes, that's what we see as strong growth for leading-edge. Most of this is oriented towards the second half calendar, as we mentioned. DRAM will also go along with that. And then HBM, the high-bandwidth memory that also pulls on certain packaging capabilities that we provide a good portion of the equipment for. So that will be the strongest pull in the market.

Now I'll just -- I'll give you the offset for a second. The offset that we have is the mature node technologies. Applied Materials calls those the ICAPS, IoT, communications, auto, power sensors, the components that are built on the more mature process technologies. We still expect some digestion in that market, and I know we'll talk about that more. But the strength and the growth that we expect will be in the leading-edge in DRAM.

So you would say next year, it sounds like you think it's more of a leading-edge foundry year and maybe '27 is more of a DRAM here?

To me, I think they go together. I think leading-edge will be stronger in '26. That's just what we see talking to our customers. But as you know, it's a forecast when you're talking about a full year. We usually guide 1 quarter and the practice is because there's a lot of variability in demand. These things are -- the demand schedule, people ask us, well, why is it second half calendar year? Why not more capacity today? Of course, it depends on your customer schedules. The customers have factory build teams. They have installed teams. They have products to ramp.

So each customer has their own schedule as to when they can take equipment, install it and start executing and running that equipment. And so it's just customer dependent, and it happens to be more oriented towards the second half of the calendar year. Yes.

I mean I think this is my 27th year covering Applied. And I have never seen anything like what we're seeing over the next few years, whether it's '26 or '27, depends on when the fabs are ready, but we have memory companies talking about CapEx being up '26, '27 and even '28 now.

So can you just talk about sort of what you see from your customers? Is this really all being driven by AI? And I know you're not going to answer this. But I mean, how -- like when you think about how high WFE can go when you plan out your business and how much cash you're going to generate, how do you link WFE to sort of what's going on in AI? Do you think that at $1 trillion in semiconductor revenue, I think you probably think it's 15% WFE intensity. So that would be $150 billion in WFE. How do you kind of think about that?

Okay. Lots in that question. I think first, it would be wrong to think that it's only AI. Our perspective, even if you back the clock up 2.5 years before a lot of the AI sensation, we would say that semiconductors are secular growth. And it goes back to what I was just talking about, the belief in the company and focusing its research material engineering for lower power solutions, higher performance solutions. We believe that, that's on its way to pervasive compute, and you'll find more and more uses for compute.

And so the company believes that it's secular demand for semiconductors, secular demand growth, secular demand growth for different compute platforms. And if you back up and just look at leading-edge logic for a second, smartphones and PCs are the biggest share of that market from a device perspective. Data center has been growing the fastest. This year, it's overtaking PCs. We think it will overtake smartphones in 2029. So it is -- what you're describing with AI, it is a big tailwind for the industry. But if you took that away, there would still be -- we would still think there'd be solid growth from a compute perspective. And if you look at the ICAPS devices, our forecast for the ICAPS device is looking forward is mid- to high single-digit growth for that market also.

So let's put that there and say, no, we don't think it's only AI. We don't think that if AI demand suddenly dropped that there would be a significant change in the semiconductor equipment forecast. We don't think so. Now you ask, change the topic a little bit and say, okay, what do you think about gigawatts and how much demand is being driven by AI accelerators and AI data center. And the way we think about that is approximately 15% of the leading-edge logic capacity right now is oriented towards the data center, AI data center products, so GPUs and accelerators. And similarly, about 15% of DRAM wafer starts is oriented towards supporting HBM and AI components. And that 15% of those 2 large components of the industry is growing at, I'll estimate a mid-30% CAGR right now.

So if you can imagine that capacity in place, you're talking many factories and growing at a 30% CAGR, that is the tailwind that the industry is looking at. And yes, they're adding to their capacity plans because of that.

And do you have a metric? I know since Jensen has been talking in gigawatt terms and equating revenue to gigawatts, everyone's asked how to connect their revenue to gigawatts. And I know Lam has tried to put up a number and their number basically equates to something like $4 billion per gigawatt. I think it's closer to $3 billion. But is there some way that you tried to tie your -- or the WFE market to the number of gigawatts that are being installed? And if you're going to do that, how would you actually do that?

I think it's very difficult. But we replicate -- we can replicate the calculations people are doing to get those numbers. What you have to think about is when you're estimating the number of wafers required to build the components in a gigawatt of capacity, once people calculate the number of wafers needed to build those components, at least what I've seen, they typically multiply that by a capacity cost that's per month, okay? So you might multiply it by x billion for 100,000 wafer starts per month of capacity for wafers. So really, what you've just calculated is that you produce a gigawatt every month. And so you kind of have to figure out, is that what you want or you want to say that's 12 gigawatts a year.

So it's a difficult metric to use that way. That's why we thought it's easier for people to think about how much capacity is supporting that today, likely not on the very leading-edge, but close to the leading-edge. What's it growing at? And then our customers that are thinking 2 years down the road, 3 years down the road, they're taking that amount of capacity, and they're growing it at 35% or higher CAGR and trying to put that in place for the products of the future. So hopefully, that describes the metric is just hard to use because I don't think you can take those numbers and just simply multiply them by the number of gigawatts and get the capacity.

Yes, it's hard. Okay. Got it. And then let's just talk about your share. So this year, you did lose, I think, in the range of 200 basis points worth of WFE share. I think a lot of that was because of a bad mix. So can you just talk about that? You sort of tried to address some of this on the call. And how much of a factor is China in that lost share?

Yes. So when we look at share for 2025, I was just looking at my wife thinking, there's a few days left, Tim. We'll see how it shakes off.

But in China, U.S. companies are more restricted from a trade perspective than non-U.S. companies. So we have trade restrictions in China. There's some customers that we can't serve. There were additional customers we couldn't serve in 2025. We had previously described that we were restricted from approximately 10%, a little bit more than 10% of the market. That was a 2024 number. In 2025, that's more than doubled. In China, over the last couple of years, it has been about 40% of WFE.

And so the restrictions we have probably cost us about 1 percentage point in share just by itself, the incremental restrictions this year. So yes, we lose approximately 1 point of share. And then also this past year happened to be a strong year for NAND. NAND grew significantly in the year. We have lower share in NAND, and it was a good shipment year for lithography equipment and we don't sell lithography equipment. And so those mix components, we didn't participate as directly. We don't think that that's indicative of what we expect this year or even in the near future. Back to the initial comments, we expect leading-edge to grow significantly. Applied Materials is #1 from a process equipment on leading-edge. We expect DRAM to grow significantly. Applied Materials is #1 in process equipment for DRAM. We expect HBM to grow rate with that. We have the #1 position on HBM equipment, about 14 out of the 19 additional tools that are needed to do the processing and stacking.

And so our perspective is the demand drivers are in the right place for Applied Materials. We're doing the work to increase our share in each of those areas, leading-edge logic and DRAM and HBM. And we think that market is kind of moving towards us partly because of the tailwind of AI. And so hopefully, that answers your question. Yes, probably between 1 and 2 points of share loss this year, China and the mix, and then we expect our position to be really strong looking forward at the market.

So obviously, you believe you're going to be a share gainer next year. So however, much WFE grows next year, you're going to outgrow that number? Sounds like that's what you think.

Well, yes, and partly the other reason I didn't mention that I should mention, we don't expect any incremental trade restrictions in China. So in '25, we had incremental trade restrictions. We don't expect those at this point. So we should be able to compete and sell to our large number of ICAPS customers in China. We also think that, that market, if you look 2 years ago, that market was kind of focused on 60-nanometer, 45-nanometer, those kind of technologies.

We think for the next few years, it's going to be more oriented towards 28-nanometer. A lot of the new customers that we're getting even over the last year are 28-nanometer customers. Applied has a very strong position in 28-nanometer uses some of the same types of copper wiring and capabilities that you see on the leading-edge. And so we think that, that will help us compete in China.

Let's actually talk about China for a moment. So there was a piece of affiliates rule came in and cost you revenue and you said $600 million next year. And now that has been revoked and there's a year reprieve on that rule. So assuming now that the government's open back up, I would assume that you're getting licenses to ship to those customers again, but you probably gave away those slots at least in the current quarter. So there -- those become additive as we look out throughout next year.

But when you think about that $600 million number, the way that these customers typically operate is if you give them a year reprieve, they're going to try to get as much as they can in that year before they know that they're going to get banned again. So why would the add back not be more than $600 million now?

It could be, Tim. Of course, we don't know that, and none of us know that at this point, but there's another factor that would go along with the question you have. And that is the $600 million was a point in time. Those are the orders that we can see. And to your point, if you stay open for business, usually you get more orders. And so it's possible that, that book of business grows. You're right about the linearity. It will be through the year as we'll have to put those back into production and secure the right specs from the customers and go through that process with the supply chain. So it'll sort of be spread throughout the year. But yes, since we can serve those customers, we'll -- it's very possible we'll get more orders.

The other thing that I wanted to mention was we had also said that we had an impact of $110 million in our just reported Q4. And what happened with that was we were able to put those slots to other customers. So we essentially swapped revenues. So we still made our revenue. We beat our guide for Q4. And what we did was we built -- use those slots, those build slots for other customers, ship that business and that $110 million that reappears in Q1, and we're able to support that. We were partially built on all those tools. So that part ended up making no difference for us.

One thing just on the topic of China, one thing I heard on the call that was new was Gary was talking about building purpose-building tools for China that are lower cost. Can you talk about that? That's the first time that I've heard Applied talk about this, and I thought that this was something that the industry should always do to try to compete with these domestic Chinese tool companies. But can you talk about how you're going about that?

Yes. The way I think about it is they're not purpose-built for China, but they are purpose-built for either new technologies, especially in the power space or mature logic nodes, possibly memory, too, but the way -- the examples that I've seen are mostly in the mature logic space.

And so I think the basic idea is you don't need the same level of precision. You don't need the same level of features on the platform as you do at the very smallest geometries. So we have been reengineering -- since I've been at Applied, which is almost 4 years, you've been working on those platforms. So they are more focused platforms, more cost reduced. And yes, I think we'll have announcements later in the year about these products. But it fits that exact example. You don't necessarily have to take all of your features back to 28-nanometer that you're currently developing today. And that relieves also price pressure on your leading-edge equipment. So we think that's a good strategy. And the only nuance there was I don't think it's China only. We will have -- it will benefit our competitiveness in China, but it will benefit our competitiveness everywhere.

And you're going to be able to go in and offer performance that's commensurate or better than the domestic Chinese companies at lower price. Is that the...

Well, the -- in China, you face subsidies, you face all sorts of dynamics in China. So I won't make a comment about the price, but we certainly think TCO, the total cost of our equipment, especially with services will be pro competitive. It will be very competitive in China.

And I think just to follow on the same topic. So you and everyone else are talking about WFE and China being down next year. Now of course, that's what you thought a year ago and it turned out to be up this year. Can you just talk about why do you see it is down? I know you talked about some digestion in ICAPS in some of the mature node. But we've seen a lot of that this year. Your China business is down 20%. Some of your peers is actually up. So it seems to me like maybe you're undershooting what China is going to actually be next year.

Well, the first thing I'll admit is we could be wrong. We thought China would be lower -- we said China would be lower each year. And we expect that again, and the main reason is the whole world has to reckon with the amount of capacity that's been put in place in China, especially on the ICAPS nodes. And I think you see that around the global companies trying to figure out how much are they going to be able to sell in China versus how much is made inside country. And since that build was so large in '23, '24, '25 and the utilization, Tim, is, I would say, not high yet at this point and not high across ICAPS.

So there is some reckoning with that amount of capital that's been put in place. And that's the main reason. And of course, we talk to customers and we have forecast from customers. And to your point, they have been lower than what has happened in each year. They typically come up in China. But right now, because of how much capacity because of the low utilization, we're still expecting a lower year for ICAPS and a lower year for China, and that's what's built into our expectations.

Got it. Can we talk about AGS, your services business? What's the right growth rate for that business going forward? And can you talk about this AIx platform? And have you seen benefits from that yet?

Yes. So for our services business, AGS. One thing we've just done, we announced during our earnings call is we've done a reorganization, and we've taken the 200-millimeter equipment that was part of AGS, and we moved that into our semi equipment business. So now when you see us reporting in the future, all of the equipment will be in the semi equipment business and all the services, it will just be services, so just recurring revenues in the service business.

And I say that because it should be easy for investors now to see that our expectation is it will grow low double digits, so no change to that. It's difficult to see that last year because the 200-millimeter equipment have a lower year. Now that will be crystal clear, We expect it to grow low double digits. And the reason it grows faster than WFE, every single quarter as we ship tools, we add to the installed base. So that's like your opportunity set growing that you can sell services to. And each quarter, our capture rate has been rising. A lot of it is because customers are building new fabs and new cities, new areas. They need the help from qualified labor to help ramp and install the tools and service the tools.

And lastly, to your point, we're inventing and adding new products in the service business all the time. We call those AIx, those are actionable insights. And some of that is AI-generated insights for customers to optimize the yields on the tools. And that added product count for the equipment that we have is growing the revenue per tool. And we think this is a win-win for customers when they use our services, they operate at higher yields and higher performance. And of course, we get to supply the product for that. So it's a win-win with the customers.

Is there a way to characterize your revenue per tool in the installed base and how much that's changed over time?

It's not something that we've shared, but it does increase. I think it's increased every year for the last few years.

And is that primarily because you're learning how to price for the performance? Is that because customers want -- they want to sign service contracts, and you can price better in that way?

I think it's -- this is a services question, right? I think it's really the added value of the services. So like I mentioned, we have new products every year. Some of these products are data products, some of these products are better service products, and I think that grows the value. So I say it's more of that than the pricing component for the services business. We do have a pricing process for the services business. A lot of that is to recognize inflation from the supply chain and different FX changes, et cetera. So really, I think it's added capability in the services.

Got it. And that kind of dovetails into gross margin, which I wanted to talk about. That's been a real bright spot. You've done a great, great job there. I mean, at similar China portion of revenue in July '22, gross margin was 46.2%, and you're guiding it to 48.5% with a similar contribution from China. So if you try to break down what that 230 basis point delta is, what is that? Because you did talk about raising prices? And does that explain most of the increase or are there other things?

There's other things that mix certainly plays in there. But in the last year, our gross margin increase. I think we averaged 48.8% for the year in 2025. And we finished at 48.1%. We guided 48.4%. So we're right in that ZIP code right now. In the last year, most of the growth, 120 basis points has been because of our improved pricing.

On the cost side, we did improve costs, but we also faced some tariff headwinds. We also faced other additional costs we had to address like adding strategic inventory and those sorts of things. And so costs ended up being a little bit of a wash. The pricing component, and I've mentioned this before on some of the earnings calls, we've had a concerted effort the last 2 years to revamp our pricing and revamp our ability to study the value of both new tools and new capabilities that we're providing the market and then the existing and then set a price target for the sales team and go through that process. It's, I would say, more disciplined than it was before, and it's helping us ensure that we address the value.

And of course, we all know that our customers, a lot of the large customers are also benefiting. AI is a good example from higher prices. And so when we're able to enable some of that capability with our engineering solutions, then we can participate in some of that value. And I think you've asked us that question before, Tim. As we focus our portfolio on more and more enabling, Applied Materials is focused on 3 generations ahead, 4 generations ahead, working very closely with customers. If you're successful in moving your portfolio to more and more enabling solutions, then it should come with higher gross margins. And so that sets the right landscape for us to tackle that.

And you talked before, Brice, about leading-edge foundry/logic. So can you give us a sense of how much you think the etch and depth intensity in your SAM expands as you go from, say, N3 to N2 to A14?

The way we've described this is the gate-all-around process technology, the SAM that we articulated for that. For just the new transistor, the gate-all-around, our SAM grows from $6 billion to $7 billion. And then if a customer also deploys the backside power distribution, then it's exactly the same number set. It's a $6 billion SAM growing to a $7 billion SAM. That's the way we described the gate-all-around transition. So -- and within that, we also have, I think, some additional share gains that help us in the original $6 billion that we have.

So gate-all-around, huge inflection. We think it's a very powerful innovation for the industry. If you look at the power performance of a gate-all-around transistor with backside power delivery. If you look at the shrink capabilities and you look at the device performance, all significant improvements over the prior transistor. And so we think it will be a powerful node. And I've said, we expect it to ramp to 300,000 wafer starts of capacity per month. And we're somewhere in that journey probably still in the first half of that journey.

Great. Can we talk just for a moment about PVD? It's about 1/3 of your revenue based on Gartner numbers, even more than that of your earnings because it does have high margins. Can you just talk about the health of that franchise? I get some questions about the franchise and about what's going on in China. You hear some of the Chinese companies saying, "Oh, we're going to fully displace them for PVD applications". Can you just talk about the health of that franchise? Because it is probably your most important franchise.

Sure. We think that -- well, first, I'll just say, I just gave you the forecast again for our gate-all-around nodes. And a lot of that is built. PVD is the metal deposition that Applied uses to help build the copper interconnect wiring that connect all the transistors in a device we've talked about 100 -- over 100 miles of copper wiring for a large device. So you can picture transistors and basically up to 18 layers of copper interconnects on top of the transistors. Those are built by our tools. Those are built, PVD as one tool in that technique, and we're not changing our forecast. There's no change. We think that's a multigenerational solution. It's critical for low resistivity solutions. And yes, I think no change in our expectation for that franchise.

Great. It sounds like the next few years are going to be great for you. So thank you again, Brice, for the time.

All right. Good to see everybody. Thank you.

Welcome to the Applied Materials Fourth Quarter of Fiscal 2025 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Mike Sullivan, Corporate Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining today's call. With me are Gary Dickerson, our President and CEO; and Brice Hill, our Chief Financial Officer.

Before we begin, I'd like to remind you that today's call includes forward-looking statements, which are subject to risks and uncertainties that could cause our actual results to differ. Information concerning these risks and uncertainties is discussed in our most recent Form 10-Q and other filings with the SEC. Today's call also includes non-GAAP financial measures. Reconciliations to GAAP measures can be found in today's earnings press release and in our quarterly earnings materials, which are available on our Investor Relations website at ir.appliedmaterials.com.

And with that introduction, I'd now like to turn the call over to Gary Dickerson.

Welcome back, Mike. Applied Materials delivered fiscal fourth quarter results above the midpoint of our guidance to complete another record year. 2025 was our sixth consecutive year of growth and over this period, we have grown revenue and earnings at annualized rates of approximately 12% and 20%. These results are made possible by our passionate and dedicated employees around the world. Over the past 12 months, we have built new capabilities, strengthened our product portfolio and streamlined our organization to prepare for the opportunities ahead.

Applied is in a tremendous position to benefit as AI computing fuels secular growth in semiconductors and wafer fab equipment. As this is our year-end call, I'll begin with a brief review of our performance in 2025, then I'll provide our latest market outlook. And finally, I'll describe how our inflection-focused innovation strategy enables us to extend our leadership in the most valuable and fastest-growing areas of the market as next-generation technologies ramp in volume production in 2026 and beyond.

Looking back at fiscal 2025, while it was a growth year for Applied, our growth rate was tempered due to increased trade restrictions and an unfavorable market mix. Over the past 12 months, multiple trade rule changes have reduced the size of our accessible market in China. Overall, China declined to 28% of our total systems and service revenues in fiscal 2025 and to 25% for our fourth quarter. In 2026, we expect wafer fab equipment spending in China to be lower, and we are not anticipating significant changes to market restrictions.

In the areas of the market where we can operate, we are competing well and maintaining market share. Outside of China, the fastest-growing areas of the market in 2025 were segments where Applied had low or no share. In leading-edge foundry logic, investment was more oriented toward advanced lithography. We believe this is a positive leading indicator for process equipment demand in 2026. NAND, where historically Applied has lower market share is on track to approximately double in 2025, even though it remains a relatively small portion of the wafer fab equipment market.

In DRAM, where Applied has strong process technology leadership, overall spending is tracking to be approximately flat for calendar 2025. Nevertheless, we strengthened our leadership position in DRAM growing revenues from leading-edge customers by more than 50% over the past 4 fiscal quarters. As we look ahead to 2026, we expect the spending mix to play more to Applied's strengths with leading-edge foundry logic, DRAM and advanced packaging being the fastest-growing areas of the market.

I recently returned from an extended trip to Asia. My discussions with customers and partners reinforce my view that opportunities for the semiconductor industry and applied materials have never been greater. Our customers are engaging with us to ensure we are ready to support significant production ramps in the coming years. AI has reached a tipping point that is accelerating investment in next-generation computing infrastructure and advanced silicon.

Today, we are seeing a virtuous cycle of innovation and demand, advances in performance, energy consumption and cost of AI computing open up new AI applications that, in turn, significantly increased demand for AI compute capacity. Recent third-party forecasts predict that the semiconductor industry will grow at a compound annual rate between 10% to 15% over the next 5 years, driving a healthy increase in wafer fab equipment spending. We expect 2026 to be another growth year for Applied with our revenue being weighted toward the second half of the calendar year.

AI computing is not only fueling growth, but also reshaping the semiconductor road map and changing the way chips are designed and manufactured. Foundational semiconductor technology plays a critical role in increasing performance and bringing down the cost of AI in the data center and at the edge. Today, major technology inflections are underway in 5 key areas: leading-edge logic, high-performance DRAM, high bandwidth memory or DRAM stacking, advanced packaging for heterogeneous integration and power electronics.

At Applied, our core strategy is inflection-focused innovation. We partner with our customers to see technology inflections early. We focus our research and development on the most critical and valuable challenges on their road maps using deep co-innovation engagement models and we create highly differentiated solutions by connecting our broad portfolio of capabilities and technologies.

The 3 products we recently launched at SEMICON West are great examples of how this strategy works. Our new Xtera epitaxi system enables higher-performance gate-all-around transistors for 2-nanometer and beyond. Xtera creates void-free source drain structures that provide higher transistor speeds that are especially critical for AI computing. The Xtera system integrates epi, cleaning and etch, resulting in a 40% improvement in uniformity and 50% lower gas usage compared to traditional epi.

Kinex is the industry's first integrated die-to-wafer bonder. Hybrid bonding enables significant improvement in performance, power consumption and costs for both complex multi-chip packages and die stacking. Connect is a 6-step integrated system with onboard metrology that provides higher accuracy bonding, smaller interconnect pitches and higher yields for new logic and memory packaging architectures.

PROVision 10 is designed to improve yield in 3D devices and further extends our leadership in e-beam metrology. eBeam Metrology is critical for 3D devices as it can see through multiple layers of 3D chips and provide multilayer images to identify defects in varied structures. This system is the first to use cold field emission technology for metrology, which increases image resolution by 50% and imaging speed 10 times compared to conventional thermal field emission technology.

Overall, Applied is very well positioned at the most valuable technology inflections and in areas of the market that will grow fastest as AI is deployed on a large scale. The process tool of record positions that we have established over the past several years give us confidence that we will extend our strong leadership position in logic, DRAM and packaging as advanced technology nodes ramp in volume production.

Another key theme we consistently hear from our customers and our customers' customers is that co-optimization of the technology stack is more critical than ever. We are expanding our deep multiyear co-innovation engagements that focus on system technology co-optimization. Our high-velocity co-innovation model provides chip makers and chip designers much earlier access to next-generation process technology to accelerate their new chip and system architectures. This is a core value proposition of Applied Materials' Equipment and Process Innovation and Commercialization platform or EPIC. Construction of the platform's flagship facility the EPIC Center in Silicon Valley is on track, and we are excited to begin operations next year.

Our co-optimization strategies extend well beyond R&D. As our customers race to bring these complex new device architecture inflections to market, we are providing advanced service solutions that help them rapidly transfer new technology into their pilot lines and then rapidly optimize device performance, yield and cost and volume production.

In 2025, our core service business delivered another year of double-digit growth with more than 2/3 of our service revenue generated from subscriptions. In AGS and across Applied, we are rapidly adopting AI and digital tools. This enables us to drive higher velocity and productivity, innovate the way we work and streamline our organization to meet the opportunities ahead.

Before I hand over to Brice, I'll quickly summarize. Fiscal 2025 was our sixth consecutive year of growth, even as trade restrictions and an unfavorable market mix trimmed our growth rate for the year. As we look ahead, large-scale AI adoption will drive substantial investment in AI computing infrastructure, including advanced semiconductors and wafer fab equipment. Applied's inflection-focused innovation strategy positions us for another record year in 2026 as we gained share at the highest value technology inflections in the fastest-growing areas of the market. As next-generation technologies ramp in volume production over the coming years, we will extend our leadership in logic, DRAM and packaging.

Brice, over to you.

Thank you, Gary, and thanks, everyone, for joining today's call. I am pleased that Applied delivered record annual revenue, gross margin dollars, operating profit and earnings per share in fiscal 2025. Looking ahead into 2026, I believe we are in great position to benefit from favorable market trends.

Based on growing demand for AI data center capacity, we forecast that leading-edge foundry logic DRAM and high-bandwidth memory will be the fastest-growing areas of the semiconductor equipment market. We have strong leadership positions in these segments today, and we have targeted our R&D investments to create new products and technologies that will enable even faster and more energy-efficient transistors, chips and systems and drive growth for Applied.

In addition, we have been working closely with our customers to better understand their longer-term demand expectations and align our supply chain and manufacturing slots to meet their needs for advanced capacity. Based on our conversations with our customers and other industry players, we are preparing our operations and service organizations to be ready to support higher demand beginning in the second half of calendar 2026.

Next, I'll briefly summarize our fiscal 2025 results versus fiscal 2024. Revenue grew 4% to $28.4 billion with growth across all of our segments. Semiconductor Systems revenue was up 4%, growing even as the impact of trade restrictions significantly reduced our access to the market in China. The impact of these restrictions was equivalent to around 10% of the China market in fiscal 2024 and more than double that amount in fiscal 2025. On a global basis, we generated record foundry systems revenue, along with record DRAM sales outside China, and we posted record revenue in both Taiwan and Korea.

Applied Global Services revenue grew 3% to a record $6.4 billion. The recurring parts, services and software portion of AGS grew by double digits in the year with the 200-millimeter equipment business declined. We grew display revenue by 20%.

I am pleased that we increased non-GAAP gross margin by 120 basis points to 48.8%, the highest level in 25 years. We shipped a richer mix of advanced systems and increased prices broadly, helping to more than offset cost increases. Non-GAAP operating expenses grew 5% and primarily driven by a 10% increase in R&D investments. At the end of the year, we announced actions to reduce head count and enable us to scale applied more productively as we capture the growth opportunities we see in 2026 and beyond. We continue to shift spending to strategic areas, adding people in fields like advanced analytics that are critical to the speed and efficiency of our R&D programs and operations.

Non-GAAP earnings per share increased 9%. We generated nearly $8 billion in cash from operations. Free cash flow of $5.7 billion included elevated capital spending of $2.3 billion, over half of which was used in building the new EPIC Center in Silicon Valley, which will open next year and become the most advanced collaborative semiconductor equipment and process innovation facility in the world.

We distributed approximately $6.3 billion to shareholders. We paid $1.4 billion in cash dividends and the quarterly dividend per share was increased by 15% during the year to $0.46. Operating income from Applied Global Services more than covered the dividend payment. We allocated $4.9 billion to our share repurchase program and reduced shares outstanding by more than 3%.

Turning to fiscal Q4. We delivered revenue and non-GAAP EPS above the midpoint of guidance. China revenue declined to 29% of total company revenue, which is in line with our longer-term average and well below a peak of 45% in the first quarter of fiscal 2024. Non-GAAP gross margin was at the midpoint of guidance and up 60 basis points year-on-year, while non-GAAP operating expenses were slightly higher than our expectation and up 3% year-on-year.

Turning to the segments. Semiconductor Systems and AGS revenue exceeded our expectations for the quarter, while non-GAAP operating margin for both segments declined along with revenue on a year-on-year basis. Lastly, display revenue exceeded our expectation for the quarter and was up 68% year-over-year.

Next, I'll share several reporting changes we are making that will help us drive further efficiency gains and also give investors more visibility into our semiconductor and services businesses. First, as of Q4 fiscal 2025, our display business is being reported in Corporate and Other. There is no change to our display strategy. Next, as of Q1 fiscal 2026, we are moving our 200-millimeter equipment business from Applied Global Services to Semiconductor Systems. This change will increase our operational efficiency and enable investors to see all of our semiconductor systems revenue in one place.

Also, as a result, Applied Global Services will consist entirely of recurring revenue. This will make it easier for investors to track our subscription-like growth in services. Finally, as of Q1 of fiscal 2026, we are fully allocating corporate support costs to our businesses. This change will have the effect of reducing semiconductor systems and AGS operating margins, but also give our teams better visibility and opportunity to optimize these costs.

Now I'll share our guidance for Q1, which includes the reporting changes I just outlined. We expect company revenue of $6.85 billion, plus or minus $500 million, and non-GAAP EPS of $2.18, plus or minus $0.20. Within this outlook, we expect Semiconductor Systems revenue of around $5.025 billion. AGS should generate revenue of $1.52 billion. Corporate and Other revenue should be around $305 million composed primarily of display revenue.

We currently expect non-GAAP gross margin to be approximately 48.4% in Q1 and remain at that level until volumes ramp to support higher demand beginning in the second half of the calendar year. Non-GAAP operating expenses should be around $1.33 billion, which is up only slightly from fiscal Q4 because the actions we recently took are mostly offsetting the increase we normally see in Q1 due to the timing of annual merit increases and equity compensation expenses. Finally, we are modeling a tax rate of around 13%.

In summary, our customers are indicating to us that wafer fab equipment spending is likely to accelerate beginning in the second half of calendar 2026. In addition, we see a positive fab equipment spending mix developing for Applied. AI data center investments translate to strong demand for our most enabling products in leading-edge foundry logic, DRAM and high-bandwidth memory along with advanced services that help our customers accelerate ramps and yields.

Thank you for listening. And now, Mike, let's begin the Q&A.

Thanks, Brice. To help us reach as many people as we can on today's call, please ask just 1 question and no more than 1 brief follow-up question. Operator, let's please begin.

Certainly. And our first question comes from the line of C.J. Muse from Cantor Fitzgerald.

I guess, Gary, the world has clearly changed since NVIDIA reported August 26 and discussed $3 million to $4 trillion in infrastructure spending. Curious, your trip to visit with clients over the very near term, how your conversations have evolved in the last 2 months? How has your visibility changed? And how are you preparing your supply chain for this likely tremendous growth?

C.J., thanks for the question. Yes, I have been spending a lot of time with customers and just came back from a long trip to Asia. And I would say I was meeting with the R&D leaders and CEOs of our largest customers, and just like you said, AI is the biggest focus for all of our customers. It's driving the WFE mix to segments driven by AI, including leading-edge foundry, logic and DRAM, where Applied has strong #1 positions. And Applied is in deep high-velocity co-innovation relationships with all of these different customers. We have very high share.

If you look at the transistor for gate all around or backside power in leading-edge foundry logic, we have very strong visibility and co-innovation relationships with customers over 4 technology nodes, a decade out in the future. So very high visibility in terms of our positions in leading-edge foundry logic and in DRAM and high confidence we're going to outperform as those advanced chips ramp going forward in the future.

The other thing that I heard and we've been seeing over the last couple of months is a major improvement in customer demand visibility. So customers, just like you said, they're planning large ramps of advanced factories, and they want to make sure our supply chain operations and service teams are ready to deliver. So we're getting more than 1 year visibility in some cases, 2 years visibility for a number of these different customers because as we talked about in the prepared remarks in the second half of '26, we will see significant ramps for these advanced factories. And again, customers want to make sure that, especially our supply chains are ready to deliver. And of course, the improved visibility is critical to our ability to ensure on-time delivery to customer needs. But I'd say that's, CJ, the biggest thing that's changed in the last couple of months.

Very helpful. And then maybe, Brice, you announced that the head count reduction over the last quarter. I'm curious how we should think about that and the implications to gross margins and OpEx into first half calendar '26 perhaps versus second half given the ramp that you've talked about?

Yes. Thanks, C.J. Good to hear from you. So on the reduction, if you look at our Q1 spend in our guide, you'll see that we don't have the uplift that we typically have in Q1, and for our annual pay raises and the share-based compensation increases that typically happen. So you'll be able to quantify the rough change in that quarter from that perspective. And just to highlight, that was a year's long program that we worked on to increase velocity and productivity across the company. And for the balance of 2026, we'll add back some skills that we need to fill in for the company. So it's really a wholesale evaluation of all the staffing model we have across the entire company.

Yes. C.J., maybe I'll add one other aspect of this. In strategic planning, we had a big focus on innovating the way we work, including AI and digital technologies. And driving, like Brian said, higher velocity and productivity, that's really at the foundation of how companies compete. So huge focus, especially on velocity across all of Applied Materials and then streamlining our organization to optimize future performance. And as we went through these changes, we also wanted to make sure, as I talked about, we see significant demand coming from our customers. So we wanted to make sure as we're doing this overall company and workforce optimization to improve the performance of Applied, we're also ready to meet those major customer ramps in the second half of '26 and then going forward.

And our next question comes from the line of Krish Sankar from TD Cowen.

Gary, my first question is, as you mentioned, you're clearly gaining share in new technologies like gate all around and backside power delivery. But when I look at your leadership products, it feels like PVD is moving to ALD on the CVD, CMP and etch side besides the usual U.S. and Japanese competitors, there's increasing domestic China competition. So I'm kind of curious how to think about the momentum in those leadership products over the next 2, 3 years as you see increasing competition, both globally and from China? And then I have a follow-up for Brice.

Okay. Krish, there's a lot in that first question, but thank you for the question. So we have very strong positions, gate all around backside power Besides being #1 in process equipment for leading logic and foundry, we're also #1 in DRAM and advanced packaging, especially for high-bandwidth memory. And those are the most important segments for AI, energy-efficient computing and leading-edge foundry logic and DRAM will be the fastest-growing segments in 26 and for the next several years.

And Krish, we're performing well across all our products. Again, I am extremely confident that we will grow share, especially in these segments that are enabling AI energy-efficient computing. Again, we have deep relationships with all of these different customers across multiple technology nodes. We see strong demand for our products increasing demand for integrated systems for transistors, wiring and now [indiscernible] for packaging. So all of that, I'm very optimistic about.

And I'll come back to your PVD comment in just a minute here. The biggest change we've seen in our competitive position in the near term is trade restrictions. We used to serve the entire global WFE market before restrictions were implemented by '24, 2024, we were restricted from serving around 10% of China's WFE market, mainly in leading-edge logic and the domestic NAND market. And then in the last month of 2024 and the first month of 2025, the restrictions significantly increased for us and we could no longer serve China's DRAM market and some of the ICAP market.

So our impact grew to well over 20% of the China WFE market which I think everybody knows that the WFE market in China has been elevated this year and also over the past few years, with China approaching 40% of total WFE. So this change in restrictions was a very big impact, especially in 2025. And non-U.S. equipment companies don't have the same restrictions and so restricted customers can buy from those companies even if they would rather buy from Applied. And we've put a lot of time and studied this topic very carefully. And what we can see is that where we can compete, we are doing very well.

And then if I look at China going forward, our business has returned to normalized levels. We talked about kind of mid- on our semi business, our systems and AGS. And looking ahead, we don't anticipate significant new restrictions. In fact, we believe that our share in China ICAPS, where we can compete was flat from 2024 to 2025, and that's across, Chris, all of our different leadership products. And we think we can continue to hold and have an opportunity to even gain share going forward. And I say this because we have several major ICAPS new products coming for China and non-China that add to the strong products we have today, enabling us to enter new ICAP's markets and also better compete in cost-sensitive areas of the market. So we will increase our ICAPS' addressable market opportunity in China and worldwide. And again, where we can compete, I'm actually very optimistic with our position.

And then back to PVD, your question on PVD. So I'll tell you, Krish, PVD is doing great where we can compete. We grew PVD in '25, we have a positive outlook in '26 and into the future. And we talked earlier about AI, PVD is enabling low resistance wiring, and that's critical for faster and more energy-efficient chips. And with advanced chips, you have hundreds of miles of wiring in a single chip. And if you could imagine, that long wire keeps getting thinner and thinner and moving data through that wire at high speed with low power is incredibly hard, almost like Magic and Applied as the clear leader in wiring innovation.

So Krish, we see strong demand for PVD, strong growth into 2026 and into the future. We're also innovating. I talked about that pipeline of innovative products. We have new PVD innovations, specifically for ICAPS beyond all of the other things that we're doing that will help us in performance in that particular segment. And then the last thing, on the leading edge, we are -- we do have an increase in demand for the integrated products, including selective ALD and selective moly which we just had some big wins in the most critical applications. So long answer, Krish.

Gary, no, it's extremely helpful and very informative. Just a quick follow-up for Brice. Brice, how do you think about the impact of this 200-millimeter movement from AGS to semi? Is there a way to quantify it for Q1? Or how much was it in FY '25?

Yes. It's approximately $125 million, Krish, for Q1 and approximately the same number. So we're moving that from our services business to our equipment business, and we think that will be easier for us to manage and easier for investors to understand those 2 different reportable segments.

And our next question comes from the line of Vivek Arya from Bank of America Securities.

You mentioned you expect fiscal '26 mix to work in your favor. You also mentioned the significant growth in the back half. I'm curious, do you think there is a put for WFE to grow high single digit close to double digits next year and for Applied to outperform that because you do seem to have better visibility and you also expect the mix to work in your favor. So I just hoping that if you could give us some sense of what the market could be doing? And how is the applied position with respect to that market?

Vivek, it's Brice. Thanks for your question. We do expect strong growth in '26, led by leading edge and DRAM. The headwind that we have, we do still expect some digestion in China and in ICAPS. So it's kind of a similar situation relative to 2025 but we think leading edge will be very strong. DRAM will be very strong. These are pulled by the headline of the AI solutions in those spaces, and then a little bit of digestion on the ICAPS side, but we do think it will be a growth year.

Okay. On the clarification side, Brice, how much of the $600 million BIS headwind is in Q1 and the rest of the year? And if I could squeeze in the real question for Gary. One of your peers suggested an $8 billion or so, I think WFE for every $100 billion or so in data center buildout, do you agree with that number? Do you have a different number? And how do you see the mix within that $8 billion playing to Applied's strengths?

Okay, Vivek. So starting with the affiliate rule that came out and affected our Q4 and then was suspended. So we had shared that $110 million was -- would be affected in our Q4. We didn't ship that in Q4, but we will ship that in Q1. So the first answer is that's included in our guide for Q1. And then the $600 million is still a good estimate for what's in the rest of 2026. And we didn't share any linearity for that. And in fact, it's still being closed in terms of delivery dates, et cetera. So I would think of that as through the rest of the year.

And then on the WFE per gigawatt, we spent some time thinking about this. We think the best way to think about this is about 15% of leading-edge wafer starts and DRAM wafer starts are allocated towards AI data center solutions. So if you think about capacity planning, that's growing at a mid-30 CAGR across the industry. So today, 15% of those 2 end markets growing at mid-30s. And so for companies that are planning capacity for 2 and 3 years out, they make that projection and that much WFE should be allocated towards data center. So we can talk more about that in a follow-up. But I think that's a good way to think about how much is being allocated.

Vivek, you asked about what does that mean, the AI demand means for mix and for Applied. So I talked about this earlier that the 2 fastest-growing segments for '26 and going forward are leading-edge foundry logic and DRAM, including high-bandwidth memory. And in both of those cases, again, we're clear #1, we're gaining share, high visibility and gate all around, and that will become clear as those advanced factories ramp in the latter half of '26. Again, we have very strong visibility, very strong positions. And the same thing is true with DRAM.

And I think longer term, if you look at gate-all-around backside power, we're positioned to capture more than 50% of our served market. So I have high confidence that we are gaining share and gate all around. I mean that's all of the discussions I had with these R&D leaders when I was in Asia in the last month. And then DRAM, high bandwidth memory, we're in really great position there. We've gained a significant amount of share over the last several years.

As FinFET ramps, we have strong leadership in FinFET. That's going to be adopted in DRAM. 4F squared, we also are in a great position. And then in HBM, future generations will adopt hybrid bonding, where we also have clear leadership. We announced Kinex at SEMICON West. So the mix is definitely working in our favor, and we're well positioned going forward.

And our next question comes from the line of Stacy Rasgon from Bernstein Research.

For the first one, Brice, this second half lift in demand. So what does that imply for the trajectory in the first half? Like are you thinking revenue stays kind of in this ballpark until we hit the second half? Or does it grow a little bit and then it grows a lot maybe even if you wanted to quantify like second half versus first half split or something like that. But like how do we think about ROCE relative to the second half given the lift in the second half?

Yes, for the semi business, Stacy, and thanks for the question. For the semi business, we think it will be flattish until we see that growth. We will see a little growth in the AGS business. We expect that as we've shared, to be growing at low double digits, and that's fairly continuous growth through the course of the year. But for the semi business in the short term, it will be flattish.

Got it. So like by Q3, I guess, you're thinking?

Yes. For us, it will really be our Q4 and our Q1 of next year. So that's when it matches the calendar. So we'll see -- we expect a significant uplift there from leading edge, especially. And until then, it will be slower growth.

Okay. And I guess for my follow-up, you sort of mentioned gross margins kind of staying in this range until we see that lift. So do you expect like a material lift in gross margins when that material lift in revenue comes through? Like how do we expect like the gross margin trajectory on the back of those revenues as that comes through second half of next year?

Yes, the 48.4% guide for Q1 is good for this level of business. And I'll just highlight in Q1, we're also expecting a normal share from China shipment perspective. So it should be -- for the whole company, it should be in the order of 29% and less than that for AGS and our semi business. So that level without a significant uplift in the business, that's good for this size business. And then when we do get to the second half, added volume will help with cost improvements. And then over time, we continue to work on our pricing and cost programs. So you can see with the 120 basis point uplift that we had in 2025, most of that was driven by price improvement. And so we'll continue with that program, but it takes time to affect the margins.

Stacy, this is Gary. One thing I'd say in terms of margins, I do think that we will be able to drive sustainable improvements in margins over time. I mean one thing in the industry, you see a tremendous amount of profits being generated with the AI demand throughout the entire ecosystem and so our customers' profitability has improved significantly. And as I mentioned earlier, also we're enabling these incredible innovations. I mentioned the hundreds of miles of wiring in advanced chip. I mean, again, for AI, this is incredibly valuable. So as we continue to work with our customers, enabling those innovations that are critical for AI, bringing new products to market. I believe that we can sustainably drive our margins higher going forward.

And our next question comes from the line of Timothy Arcuri from UBS.

Brice, I'm trying to understand China a little better. So all these affiliates were banned and then they got reinstated. And the way that China usually operates is that they when they were rushing to get in front of the ban. And now I would think that they're going to come back and they're going to just try to get as much equipment as they can as fast as they can. So is the add-back not going to be more than 600? And in fiscal Q1, like are you taking slots away from the other customers to give to them? I guess, I'm trying to figure out how we don't add more than 600 back the way that these Chinese customers typically operate.

Thanks for the question, Tim. So yes, for the first quarter, $110 million is in the quarter. Those tools are built and will ship. For the balance, we weren't building those tools. We didn't know we would be able to ship them. And so it's going to take time to do the supply chain and actually make the builds, and we'll have to finalize the date with the customers. So they may have interest in working that process as quickly as possible. But I would just say the good way to think about this is cycle time and we'll spread it through the year.

Okay. And then I guess, Gary, I wanted to go back to PVD. So this is like 1/3 of your systems revenue per Gartner. So it's a super important piece of your business. And it does seem a little bit like ALD's eating into this franchise a little bit. I know it's super important. It's been growing. But how do you sort of protect that franchise from -- you have 1 franchise that you're very strong and then 1 where your share is not as high end. Do you think that we're all kind of maybe too concerned about the degree to which ALD eating it to PVD?

Tim, thanks for question. I absolutely think you're too concerned. Again, as I mentioned, I just spent a lot of time in Asia with our R&D leaders for our top customers and we have deep visibility into their technology road maps for generations. And I can tell you, again, we have high confidence PVD is going to continue to ramp. I mentioned the hundreds of miles of wiring and an advanced chip. And we have innovations that are really amazing innovations, and we are the leader in wiring. So if you think about an AI server, again, how you move the data at a very high speed with low power is enormously important. That's within a chip, chip to chip, there's so much innovation that's happening there.

But I don't know where this comes from on the ALD eating PVD share, that type of thing. All I can say is that we have extremely high visibility we have unique technologies, including PVD and we have unique ability to combine technologies into integrated platforms. One of those integrated platforms, we combine selective ALD together with PVD and 5 other technologies, that's part of what's enabling those hundreds of miles of wiring and Applied is really unique in being able to deliver those kinds of innovations. And that is enabling 50% improvement in resistivity. It's a $1 billion business for us every year. And so that is going to continue. And again, deep visibility into every -- the N+1, N+2, N+3, N+4 technology node.

Another innovation that we just won with leading foundry logic companies is integrating selective moly with PVD into an integrated platform for the most critical applications for our customers. So again, Tim, very high visibility. I agree with you. It's a great business. It's going to keep growing in '26 and keep growing as we go forward.

Our next question comes from the line of Atif Malik from Citi.

Welcome back, Mike. Brice, I'm just trying to understand the China commentary, you're expecting China to kind of stay at the mid-20s level for the silicon products into next year. So if the assumption is that the domestic China spending is coming down next year, why would this number be lower than the mid-25% and if the rest of the China is growing? I'm just trying to understand the moving pieces.

Yes. Thanks, Atif. So for Q1, that just happens to be what's in the mix but we do expect it, if we do have the digestion that we're expecting in China, then we will see it lower during the course of the year. and that will be more than offset to get a growth here that will be more than offset by the strength in leading edge and DRAM that we highlighted earlier. So -- and we'll just admit, I think we've been wrong for 2 years in a row, forecasting a digestion related to China, and it's been stronger each year. So we could be surprised on the upside as we go through.

But right now, Gary mentioned this a few minutes ago, China has been almost 40% of WFE. It's been elevated. They've been investing heavily to get to self-sustainability from a production perspective. So we don't have as good a visibility because of a large number of customers there and continued creation of new customers. So it's not as easy to forecast as the rest of the mature market.

Yes. I'll jump -- none thing I would say also Longer term, what we think is that ICAPS remains about 1/3 of WFE and then you have memory and leading-edge foundry logic. So China is really mostly an ICAPS market, and there has been this elevated spending over multiple years. We think that if you just look at end market demand, we think that moves back into that ZIP code over a longer period of time. When that happens, hard to anticipate exactly when that's going to happen, but that's what we think about over a longer period.

Great. And then, Gary, one for you, you visited several customers. Are your memory customers constrained by shell capacity? Why are we thinking about the second half inflection on the first half? I mean I understand the first half is being dragged lower by China. But is there a situation where the memory guys are constrained by shell capacity that explains why second half is going higher?

Well, I can take the question, Atif. So first, we would say that factory schedules of course, matter. So each company -- each customer has their own schedule for installation and ramp and qualification and the like. Our information on the macro level, we had several people ask this question, but our information on the macro level suggests that there is factory capacity from a space perspective, to ramp across the industry. And then you'll just have to ask each customer. That's a macro answer, you'll have to ask each customer for their situation. But we don't think the capacity is limiting the ramp at this point.

And our next question comes from the line of Charles Shi from Needham & Company.

I have a follow-up on China. You did mention outside of restrictions, you are not losing share but your U.S. peer the closest one, reported much stronger China revenue growth this year, I think they're probably growing at 20% year-on-year. You're probably declining more than 10% year-on-year. So just really trying to reconcile how are you're not losing share? Is there some nuances that we may be missing and that would suggest you actually did not lose share in China despite the numbers would suggest otherwise?

Charles, I'll start on this one. So I think the nuance we clarified that or we made an adjustment in there and said, if we look at the accounts that we can support, we're holding our share and competing well in China. And if you just take the macro number, we certainly lost share in China. I think Gary commented that if you go back to 2024, just over 10% of the market was restricted from -- for U.S. companies. And if you go to 2025, it's more than doubled. The restriction has more than doubled. So we've certainly lost share in China because a larger portion of the market is inaccessible to us. But when we look at the accounts that we can sell to, we feel we're competing very well.

Yes, Charles, this is Gary. I think we have done a lot of work on this. So -- and there's lots of different sources of data that can cross validate the numbers. And again, when we look at -- we can't comment on other people, their ability to serve global customers that are in China versus domestic customers, everybody is going to have a little difference in terms of what they're serving in China. Certainly, for us, NAND, the global NAND in China is not significant business. DRAM, however, which really was restricted at the beginning of our fiscal year, we have very high share in DRAM.

If you look at the top -- the leading DRAM companies in this last year, I think our business was up something like 50%. And so for Applied, DRAM going away had a really big impact on us. So again, Charles, I think we have pretty good confidence in maintaining share, where we can compete, but there's going to be a different mix for every company. I don't know, Brice, if you want to add anything else?

No, I think that covers it. Yes. The other thing that I would add to that, Charles, is the other part of that is not only the DRAM, but it's the NAND. So if you think about it, what was shipping. You have multinational NAND companies that are in China and they were presumably pretty strong. And as you may know that in our mix, that's the lowest area for us. So Gary talked about the DRAM impact. The other impact is NAND being strong. And both -- and that equation in the future on a global basis, we think is changing.

And our next question comes from the line of Joe Quatrochi from Wells Fargo.

I was wondering if you could help us understand just what was the size of the advanced packaging business in fiscal '25. And how did that grow?

Joe, it's Brice. It's a little bit lower than it was in 2024. So 2024 was buoyed by the shipments, the high shipments in the end of the year for HBM. So it's essentially been running at the same level for 2025 minus that extra shipments at the end of that year. So -- and then as we look forward, Gary is going to comment about the changing technologies for advanced packaging over time. We think we're well positioned for that. we still think that business will be growing significantly along with AI data center and all the different packaging capabilities that will be required over time.

Yes, Joe, so Applied is #1 in high-bandwidth memory. And so that business was not as strong in '25 as it was the previous year. So that was one thing that impacted our relative growth rate, but it's pretty close to flat year-over-year, '25 versus '24 with the HBM coming down versus where it was. What I would say is that we're still on track to what we've discussed before. We've grown the business around $500 million to about $1.5 billion today. And we're on track still to double this business to $3 billion or more over the next few years. And we're in a very good position.

As I said earlier, we're #1 in HBM. So as HBM ramps over time, that puts us in a good position. We have a great portfolio of products and especially this is -- I mentioned the trip in Asia and meeting with a lot of these R&D leaders, there's an enormous focus for our customers to go to larger packaging sizes, so they can connect more GPUs, CPUs and all these different computing components to improve performance and power an enormous amount. And so Applied is extremely well positioned in HBM. And we're also well positioned as these new technologies ramp for the future. So I think high confidence in being able to double this business again over the next few years.

That's helpful detail. Maybe as a follow-up on the China entity list of $600 million that maybe comes back here. Any help on what the split of that was for like AGS in terms of services. I assume that would basically just kind of turn right back on given you're able to service those customers.

Yes. You're right. There was some digesting that. We didn't offer that, and I don't have it at my fingertips. So there was a component of AGS, but I think the majority was equipment.

And our next question comes from the line of Shane Brett from Morgan Stanley.

First question is, you mentioned that your revenue from leading-edge DRAM customers is up 50% in fiscal '25, which is stronger than those customers DRAM WFE spending to my knowledge. Where specifically are these share gains of these leading-edge customers coming from? And now that you're past extremely tough China DRAM comps, just how you expect to DRAM business to track in 2026?

Yes, I'll start, Shane. So when you do the year-over-year comparison, it looks flat for us from a DRAM perspective, but what was happening in 2024, we shipped a significant amount of business to China customers. And so we basically had the same business in 2025 without the China customers. So all of that business went to the internationals and that equated to approximately a 50% growth for them. And we do expect DRAM to strengthen as we go into and should be healthy growth in the -- across the customers for DRAM investments.

Yes, Shane, just in terms of where are we gaining? Certainly, I mentioned earlier, high bandwidth memory, that's one part, one segment where Applied is clear #1, and that is helping us. The DRAM companies are driving innovation in I/O in Applied, that really leverages a lot of our leadership products and foundry logic. In fact, they're moving to going forward. That puts Applied in a good position even to gain more share as we go forward, we have a strong position in capacitor scaling. We have a really strong etch share in DRAM, and we've achieved patterning share gains. So those are a few areas.

And again, I would say, going forward, as these DRAM companies adopt hybrid bonding for HBM as they adopt FinFET as they adopt 4F squared, the vertical channel transistor architecture in all of those areas, we're positioned to gain share as those new technologies ramp.

Got it. And my second question may be a little bit critical. But your fiscal '25 foundry logic revenue is up about 3% year-over-year, but your U.S. peers who should be on a level playing field if you are recording extremely strong double-digit growth through the first 3 quarters of the year. Just what's your self assessment on this performance gap with those U.S. peers? And just how should we have confidence that Applied can outperform Foundry Logic WFE in 2026?

So foundry logic includes both leading edge and ICAPS customers. So those 2 things are mixed together. If you look, we had record revenue in Taiwan, record revenue in Korea and so our performance is extremely strong, and the leading edge, our revenue is up a significant amount. So you have all those things kind of mixed together, I think, in those -- in that data and because everybody is combining that.

And operator, we have time for one more question, please.

Certainly. And our final question for today then comes from the line of Jim Schneider from Goldman Sachs.

Relative to the strength you're TM2 across leading edge logic and DRAM, can you maybe guess which one might grow stronger than the other? And which one might start to recover first?

Sure, Jim. We think leading edge will be the strongest grower with DRAM second. So that's our forecast.

Yes. The one thing I would say, Jim, I think both of them are going to grow at a pretty strong rate. But it really -- in terms of when we see the revenue depends on fab timing. And so that's why we talked about kind of second half of calendar and those were the discussions I had with a lot of the Asian customers when I was traveling and the dramatic improvement in visibility. So that also you have to take into consideration when you think about the timing of when those ramps will happen.

And then maybe as a quick follow-up. Gross margins, you're expecting to increase in the back half once you get better absorption on the costs. I understand that but are there any other underlying initiatives you're doing to improve gross margins operationally that could cause kind of a further tailwind once we get there?

Sure. Thanks for the question. So on the gross margin side, if you look at '25, up 120 basis points from '24, the majority of that really has been improvement in our pricing processes, good change that we made. We highlighted in previous calls that we revamped our entire pricing program across the company. But we're also working on cost reductions. The cost reductions were offset to some degree by tariff headwinds and by some of the inventory management, et cetera. So the real driver during the year was the price process improvements. And those will continue as we go into -- so at the calendar second half, as we get more volume and you get some time for those to work, we should be able to improve the gross margins.

Thanks, Jim. And Brice, would you like to sum up today's call?

Thanks, Mike. I'm excited that the investments we're making in leading-edge foundry logic, DRAM and high-bandwidth memory, give us technology leadership at the same time, our customers are signaling an inflection in the AI-related fab equipment spending in the second half of calendar '26. I wish everyone a nice Thanksgiving, and I look forward to seeing many of you soon at the UBS conference in Scottsdale. Mike, please close the call.

All right. Thank you. And I'd like to let everybody know that a replay of today's call is going to be available on the IR page of our website by 5:00 p.m. Pacific Time today. In the meantime, thank you for your continued interest in Applied Materials.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Good morning, everybody. Welcome to the Goldman Sachs Communacopia Technology Conference. My name is Jim Schneider. I'm the semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome Applied Materials and CEO, Gary Dickerson on to the stage today.

Welcome, Gary.

Thank you, Jim. Happy to be here.

Thanks for being here.

Maybe just kind of given your long-standing experience in this industry, you've seen many industry cycles. You've been Chair -- at the helm of Applied since 2013. It seems to me over the last 5 years, there's been some really confluence of secular and cyclical dynamics in the industry for semi-cap, a series of onshoring initiatives globally, U.S., Europe, Japan, China. At the same time, we've seen a number of technology changes from gate-all-around logic to 3D memory structures and the like. During the earnings call last month, you guided your October core revenue below the street. I've gotten an increasing number of investor questions asking whether this could be or signal the top of a down cycle. I'd love to get your perspective on whether you believe that's the case or not.

Yes. So I would say that for Applied, we've grown revenue. This will be the sixth year in a row. We're on track for the sixth consecutive year of revenue growth. And in terms of the industry, AI is the biggest inflection of our lifetimes. AI and robotics, I think, are the biggest productivity accelerators of our lifetimes. And that is driving increase in demand for compute and also for compute innovation. So if you think about AI as the key driver for the industry, the segments that will grow the fastest are also the segments where Applied has clear leadership, leading-edge foundry/logic, compute memory with DRAM and high-bandwidth memory and also advanced packaging.

And if you think about -- and I'll get back to your other aspect of your question. But if you think about kind of what we see going forward, I think the industry going to $1 trillion by 2030, being driven by the biggest inflections of our lifetimes that touch every single industry. I think that's really what our customers are focused on. And really, if you look at that 2/3 of the market, there are just a handful of customers that are racing for leadership. You have 3 companies in leading edge foundry/logic, 3 companies in DRAM and compute memory. And for those companies, what is absolutely crucial is being first to market for the architecture inflections. Again, and that's really everything.

Design wins for those companies are based on performance yield and reliability around those inflections and Applied Materials is in by far the best position to enable -- strategically enable design wins for our customers. Our portfolio is unique. We have a very broad portfolio of materials innovation technologies. We have about 30% of our revenue coming from integrated platforms that are absolutely crucial for those inflections. We have integration innovators uniquely in the industry. So we're driving high velocity co-innovation with all of those different companies, many technology nodes out in the future, 4 technology nodes a decade out in the future.

So again, for our customers, we've never had deeper or broader relationships. And then from an Applied perspective, our focus is really to be the most enabling company for those inflections because, again, that's really life and death for our customers. And we're much larger than our next closest competitors relative to our market share in those big markets, the amount of enabling technologies we have. And then for every one of these architecture inflections, there are a few tipping points that determine who wins and loses. So when the -- when the customers are racing for gate-all-around or backside power or new DRAM architectures or new packaging architectures, again, we have incredibly unique capabilities, unique innovators, very deep connectivity with all of those different companies.

And again, there are a few -- just a few of those companies where Applied is by far the leader and very high confidence that we're going to continue to lead and gain share through these architecture inflections. Then your question about downturn, I just don't see that. I mean, certainly, another part of the market is ICAPS, IoT, communication, auto, power sensors. And there is a period of digestion now. If you look at '23, '24, the 2 previous years, there was tremendous investment in ICAPS. So ICAPS is down this year. And we formed our ICAPS group actually April 12, 2019. I still remember when we pulled that group together, Applied has a very unique capability in this segment of the market.

And I feel really good. We can talk about that later about our ability to perform really well going forward in the ICAPS market. But the near term is really -- part of it is being driven by this digestion in ICAPS where you had just tremendous spending in the previous 2 years.

Yes. Yes, it makes sense, and we can get to...

And I think a year from now, this whole thing on downturn, we won't be talking about that. It will be very clear.

Excellent. Excellent. Very good. So maybe if we can kind of unpack some of the different moving pieces there. Let's talk about leading-edge foundry logic. Clearly, you've had a lot of market share strength with gate-all-around backside power. Those seem very relevant. Maybe talk about your position at the top customers in the industry, as you mentioned, very concentrated, especially in the leading-edge foundry logic space. I'll get a lot of investor questions wondering why you see a bit of an air pocket in that segment when others are guiding for relative strength. So maybe you could help investors contextual...

I think leading-edge foundry logic, we're still performing incredibly well. As I said, we have deep visibility. I mean we really are co-innovating with all of those different companies. So we have a really good understanding of performance yield across that whole landscape. I think it's also though lumpy so that really, the revenue is dependent on the timing of fab ramps. And so you don't have many customers there. There's been even more market concentration.

So really, the revenue timing is more dependent on the ramp timing. But again, from a standpoint of Applied's position, as you go through these architecture inflections, every single inflection, our customers are focused on energy-efficient computing. So 10% to 15% improvement in power, 20% to 30% improvement in performance. And they also are focused on 10%, 20% improvement in area scaling. Now more of the area scaling and really all of the power and performance is enabled by materials innovation. The areas where Applied has tremendous strength, far stronger than any of our competitors.

Yes. Maybe you talked about ICAPS a moment ago. You talked about some potential digestion given all the capacity that's been built. Can you maybe specifically address China? And what do you see as the forward demand outlook from your Chinese customer set, Chinese WFE spending sort of writ large? And do you think there's sort of a digestion in China as well as broader ICAPS?

Yes. So I would say, again, ICAPS, we are in this period of digestion, as I talked about earlier. The previous 2 years, you had very strong spending in ICAPS, including in China. And so in '25, the spending is less. And there's going to be a period of time where we go through this digestion. And longer term, I would say that ICAPS, we see as kind of mid- to high single-digit growth rate. If you think about robotics, edge AI feeding into all of the large language models in so many different kinds of applications, power electronics for the grid, for the automotive industry, image sensors, again, in so many different kinds of applications. We think that's going to grow kind of a mid- to high single-digit growth rate, but you do have a period of digestion that we're working through that will take some more time.

But then once you get through that, we do think that, again, that market is going to grow kind of mid- to high single digits. And then from an Applied standpoint, I mentioned we formed that group in 2019. We've performed really well in ICAPS, bringing many new products to market. And I think our strategy is different than some of our peers. We're not focused on just incremental modifications to existing architectures. We are definitely focused on -- we have integration innovators in ICAPS, just like we do on the leading edge, so on power, image sensors, any of those different device verticals. We're co-innovating with customers in ICAPS also.

We have a very robust pipeline of new products, products that will expand our total available market in ICAPS that are significant innovations that are important for design wins for our customers in those verticals. And another thing we're focused on through a large part of our portfolio is cost innovation. So again, for Applied, our main focus is to be the most enabling company for our customers in every one of those segments because that's strategically critical to their competitiveness and their design wins.

And then that enables us also to win ties in the areas that are cost competitive, but we can't win the ties if we're not -- if we don't have those cost competitive products. So I would say more so than ever, that pipeline of innovations that we're driving in ICAPS, both in areas that expand our total available market and improve our cost competitiveness, those are key strategies that we're driving in Applied. And I feel very positive that we will do well where we can compete. There are export controls that have limited our ability to compete in certain customers. So that is something that certainly has impacted our near term. But I feel really good about competing where we can compete. But there is going to be, again, this digestion period in ICAPS -- as also the customers -- new customers are ramping yields, that's also going to create some type of digestion period. But over time, again, all of this edge AI, robotics, these are areas that we feel the market opportunities are good over the longer term, kind of mid- to high single-digit growth rate.

Fair enough. Another one relative to China. Recently, a couple of weeks ago, we got an announcement out of the U.S. government that the license exemption for multinationals in China, Samsung, Hynix, Intel and TSMC have been rescinded starting early 2026. I'm just wondering if that is the same or a different issue than you noted on your last conference call relative to license and maybe sort of in the medium term, what impact do you expect from that change?

Yes. I'm not going to speculate on trade policies or the geopolitical policies, those types of things. Obviously, there's a lot of dynamics that are happening there. And what we talked about on the licenses were products where we're not restricted, where we're just not seeing anything flow. And I think that's been something over the past several months that many people have seen that same type of situation. I know some of the other tech companies have commented on that. So I think that -- and then on the multinationals that are in China, that's really a different issue. But again, I can't really speculate on how that will play out over time.

Okay. Very good. And maybe you don't want to talk about this, but I'm just kind of curious, given the preliminary tariff regime on semiconductors that's out there from the administration, curious as to whether you think structurally, that's going to drive sort of an increase in U.S. fab spending domestically.

Well, I think for sure, if the Trump administration is very focused on bringing more semiconductor manufacturing into the United States. There's no question about that. You see what's happening with TSMC in Arizona and many different companies, both in the leading edge, also in the ICAP space. And that's good for us for sure. We're making investments in the U.S. We're making investments in manufacturing. We talked about a few hundred million dollars investment that we made in Arizona. We have our EPIC center, equipment process and innovation commercialization center that will come online next year in Silicon Valley. And that's going to be a real accelerator for Applied Materials and the entire industry.

I talk about everybody racing, racing for leadership in those architecture inflections. And so being able to have our customer innovators co-located with our innovators, where Applied is, again, the clear leader in materials innovation is a really important strategy so that we can drive those innovations in parallel versus a slower serial type of an approach. So we're making big investments in the U.S. and also the -- bringing those fabs to the U.S. where they don't have an existing infrastructure in place also helps our service business. Our service business is over a $6 billion run rate, growing at a double-digit compound annual growth rate in the past and also going forward.

So as those companies are moving to new locations with very complex architecture innovations. Again, we're seeing more traction for our services. About 2/3 of our services today are long-term subscription agreements. So it's very sticky. We've grown our service business 24 quarters in a row. So that gives us a tailwind to continue that double-digit growth rate in that large service business for Applied Materials.

Very good. I want to turn to the end markets for a moment. I know you don't like to give a quantitative market estimate or outlook for WFE spending, but I'd love to get your perspective on directionally whether you think 2026 will be a growth year for the industry in light of the fact that you don't think we're entering a downturn? And then maybe within that envelope, do you think -- which of the end markets that you serve, you think is going to perform best versus lag a little bit?

Yes. So as you said, I'm not going to guide on 2026. But what I would say, I'm highly confident, again, connecting with CEOs constantly all the top companies that AI is going to drive -- our customers are telling us that data center wafer starts will pass PCs and smartphones. So again, the growth in leading-edge foundry logic, we feel very confident and very positive that, that compound annual growth rate over time is going to be very strong. In compute memory for DRAM and high-bandwidth memory for AI, those are critical technologies. And we talked about in our leading DRAM customers, that spending is up around 50% this year.

So again, we are restricted in China, so we can't serve the China memory companies. So that is something that's offsetting this tremendous growth in DRAM. We've gained 10 points of share in a little over a decade in DRAM. We can talk about the architecture inflections there later. But we're very positive on the growth rate in compute memory going forward. And then I would say packaging is another one where Applied, that's really our strongest overall share position. There's going to be tremendous innovation in how you connect all the computing components together. If you look at AI server architectures, the way they look 3, 4 years from now will be very different than what they look like today. So there are critical architecture inflections there.

Everybody wants to go to larger body sizes where you can connect more computing components together. And obviously, power and performance is absolutely crucial. How you move data between all of those computing components will be completely different in a few years versus what it looks like today. And Applied really has deep connectivity into those markets. ICAPS already talked about kind of a mid- to high single-digit growth rate once we get past this period of digestion. And then NAND is up a fair amount this year off of a very low base. And I would say we're -- if we look at the overall WFE mix going forward, we would say that the foundry/logic is about -- leading-edge foundry/logic is 1/3, ICAPS is 1/3, memory is 1/3, more weighted towards DRAM compute memory than storage memory NAND. That's kind of the way we see it going forward.

And I'm actually extremely positive. Again, we have high visibility relative to all of the fab investments. There's over 100 fabs that are being built by customers today. Again, the business is not linear because it depends on the timing of when those fabs are being built. You have a period of time now where you have digestion in ICAPS, but we're very positive relative to $1 trillion semiconductor industry, kind of mid-teens capital intensity and applied more of the spending going to materials innovation to enable power and performance architecture inflections over the next several years.

Great. It sounds like you got high conviction in the advanced leading-edge foundry and logic business. Maybe talk -- unpack the packaging business, the advanced packaging segment for a second. Maybe just give us a sense or can you contextualize roughly what scale business is that for you today and sort of going forward, what growth rate you expect that to go at? And how has that changed from maybe your expectations a year ago?

Yes. So it's over $1.5 billion. And we've said that in the next few years, we can double that business again to around $3 billion. We're in a very strong position with a broad portfolio of technologies. We're working with customers innovating many nodes out in the future to new packaging architectures. And I would say here, you're going to see tremendous architecture inflections over the next 2 or 3 years. Again, people want to connect more of these computing components together, especially for AI servers. So a lot of the innovation around those packaging architectures are really being driven by that inflection.

Applied not only has the broadest and most unique portfolio of technologies. We have new products that are in the pipeline that are really critical. Hybrid bonding is one that is going to be important for high-bandwidth memory, future architectures and important for chiplets for logic. And Applied also has a unique packaging R&D facility where we have full flow packaging. We're the only company that has that in the industry. And our customers, just like we're talking about EPIC co-innovating for those advanced chip technologies as a game changer for Applied and for our customers. We're doing the same thing in packaging.

So we're working with all of these companies innovating on these new architectures. We're even working with companies across the ecosystem on new packaging architectures. So again, very strong position, over $1.5 billion, growing to $3 billion, and it's going to keep going from there. Again, this is how you connect all these computing components together is really important to drive energy-efficient computing in the industry.

That's great. DRAM, you touched on it before. I'd like to just explore a little bit more. Can you maybe talk about -- you previously talked about, I believe, 75% of incremental HBM steps for HBM memory you're capturing. As this technology evolves, what's the right way to think about kind of how you benefit as we move from HBM3E 12-hi to 4 and 4E? And then separately, if you want to maybe touch on 4F-Squared cells, what that means for you?

Sure. So yes, high-bandwidth memory, we have a very high share. As you said, there's like 19 new steps, 14 new steps. We have a very strong position. And there is an architecture inflection where people will go to hybrid bonding for HBM. Again, we have the leading technology to enable that inflection. We have a strong partnership with Besi, and that's one of our integrated platforms. We have 6 technologies integrated into a single platform because as you're driving these bonding technologies, all of that interface engineering and surface preparation is incredibly important for yield for those particular inflections.

So very strong position in HBM, very high market share and a very strong position enabling the key technologies for those future architectures. In DRAM, overall, as I said, we've gained 10 points of overall DRAM share over -- a little over a decade. And in the future architecture inflections, you have FinFET for high-speed memory, that's going to be a big inflection where Applied has clear leadership and is enabling the inflection for our customers. And then in 4F-squared and 3D DRAM, those are very big inflections that are really enabled through materials and architecture innovations.

So Applied, when we're working with any of these companies, when I'm meeting the CEOs of our customers, there are a handful of innovations that are the tipping points for any one of these different architectures. So one of the CEOs and CTOs I talked to recently, the top 3 innovations for one of these future DRAM architectures were all from Applied Materials. So basically, the innovation won't happen unless we can co-innovate around those enabling technologies. So we have very deep connectivity. We're enabling this FinFET inflection. We're enabling these architecture inflections where you're going more vertical and they are really enabled by materials innovations versus lithography.

So over time, more of that, not only is the wafer fab equipment spending increasing, but your -- more of that is moving to Applied Materials. Last thing on HBM, I don't know if I mentioned this or not, but you have to start at least 3x more wafer starts for HBM because the die sizes are bigger and the yields are lower. So that's another factor that's driving growth in compute memory. But again, this is an area where Applied has outperformed with 10 points of share gain and very well positioned to outperform going forward.

Great. One last one on process, which is a deposition etch, you're clearly the market leader in deposition. Can you maybe talk about the runway you believe you have an etch? And where do you have an edge versus your competitors?

Yes. So we've been gaining share. We had our first $1 billion quarter in etch. We've been consistently gaining share in conductor etch, especially in DRAM, but also in foundry logic. We've gained share, especially with leading customers in foundry logic, significant market share with technology innovations we have within the etch business unit. The other thing I would say that not only do we have great technology and great innovations that we're enabling that have enabled us to gain several points of etch market share, but also there's this concept of co-innovation. So when you're creating these new architectures, you're creating new materials in those structures, you're shaping those structures, modifying those structures. That's a multibillion-dollar business for Applied Materials, and you're analyzing those structures.

So we have great innovations within our etch business unit that are enabling us to gain share. But even more important than that is our ability when we bring a new deposition material to the market, we're able to co-optimize that for customers so that they can accelerate time to market for those innovations. So that's another aspect that's enabling us to grow, but there's significant opportunities for us to continue to grow etch share in memory as these new architectures are adopted and also in foundry/logic.

Great. I want to ask a couple of questions on initiatives in your overall portfolio of business, if I could. How are you feeling about the overall mix of business that Applied has today? Are you sort of exclusively focused now on continuing to drive market share leadership in the semiconductor equipment space? Or can you imagine diversifying other revenue streams over time?

Yes. So I think the key thing for us, again, 2/3 of the market, there's a few customers. So being the most enabling company for those customers puts us in a very unique position. If we're enabling their design wins and their competitiveness, that creates a great opportunity across Applied's entire portfolio. So I'd say that's our #1 focus. Service, as I talked about, that's a double-digit compound annual growth rate. It's a very big business. You have these companies ramping these complex new architectures. We have a lot of service innovations. That's another one that we're driving. We have made progress in some of these adjacent markets. Display has come off a multiyear bottom with some increase in growth, operating profit kind of mid-20s, I think, this last quarter. I think that will continue to grow over time.

This inflection in OLED for IT is a good opportunity for us. We have some unique enabling technologies there that can enable new display architectures. So over time, again, that's not going to happen very quickly. But over time, that will get, I think, incrementally better. And we are looking at other areas where I think what we do is amazing. All of the materials innovations that we enable within Applied Materials, again, in your cell phone, you have 60 miles of wiring in your application processor chip. Think about that, a 60-mile long wire where you're moving data, lightning fast with no resistance, it is almost like magic what we're able to do. So we are looking at some of those adjacent markets.

Display will be incrementally better, I think, as we go forward. And there are a few other ones. But I would say still semi, if you look at least what we see, tremendous opportunities, the industry growing to $1 trillion, applied, the material intensity increasing, our unique position to enable those inflections that are critical for our customers is a great position to be in. So that's still the area that we're most focused on from an investment perspective.

Great. Just maybe finishing out a couple more. One is give you a chance to talk about EPIC for a second. Is that still on track to launch in spring of next year? And maybe contextualize for people, you talked about co-innovation with your customers, but what does that drive in terms of the financial results down the line?

Yes. So I talked about this concept of high velocity co-innovation. So in every one of these different segments, the companies that win the architecture inflections win big. And it's really -- it's the whole ball game from a competitiveness standpoint. So there is a race for those architecture inflections for all of our different customers. And it's very clear to us, again, we have such deep connectivity with every one of those different companies over multiple technology nodes. The companies that are moving at the highest velocity with a culture and leadership focused on co-innovation have been the leaders.

What we see with EPIC, and we shaped EPIC with our leading customers to go even higher velocity. So the ability to have those innovators next year in '26 in Silicon Valley with our innovators will accelerate those technology inflections. And our customers are focused certainly on their N+1, N+2 design wins. I mean that's really incredibly critical for them. But again, the earlier you start on those innovations from materials to systems, the ability to bring those architectures to market with high yield is everything for competitiveness.

So being able to work on the N+ 3 and N+ 4 technology nodes earlier, faster from an innovation standpoint is absolutely critical to our customers. So we shape the concept with them. And of course, for Applied, it enables us to be designed in with our equipment and our services as those new architectures are ramping to market. So again, I'm really excited about it. I hope everybody can come. We'll have a grand opening next year. But it's a great strategy for Applied Materials and a great strategy for the industry.

Great. Last question. I think you've met with a lot of investors since the earnings call and maybe here so far at the conference. Curious, as you reflect on investor commentary, what's the one thing that you think people are missing about the Applied story today?

I think Applied is in an incredibly unique position. Our ability to enable these inflections, our strategic enablement position at the top customers is a significant competitive advantage. And that's really where everything starts with each one of these different customers. Again, for them, it's critical for their design wins. We are incredibly well positioned going forward to gain share at these architecture inflections. Personally, I've never been more excited about the position for Applied. And then I'd say that our service business that's growing at a double-digit compound annual growth rate, I feel really positive on that, too. So I've been in the industry for a long time. I've been at 3 different companies where I've been incredibly successful. I would say I've never been more positive or excited than I am today.

Fantastic. Well, Gary, thank you for being here with us today. We appreciate it.

Great. Thank you.